What is Gather In The Stops?
Gather in the stops is a trading strategy where investors attempt to drive down the price of a stock by selling large quantities of stock to trigger stop orders.
Key Takeaways
- The practice of the gather in the stops strategy is to force stop orders into market orders.
- Some exchanges have policies in place to stop trading when this happens so that prices aren’t artificially driven down.
Understanding Gather In The Stops
The practice of the gather in the stops strategy is to force stop orders into market orders. A stop order is a standing order to purchase or sell stock once an established price is reached. Once the price is reached, a market order completes a sale at the current market price.
Once the stop orders become market orders, the sales are completed at the current lower prices. This is also known as snowballing, or creating a snowball effect, and it will continue until trading is suspended or investors pull back and stop the orders on their own.
Some exchanges have policies in place to stop trading when this happens so that prices aren’t artificially driven down, or driven down to drastic levels that may have catastrophic results on the exchange. The practice isn’t illegal, which is why it is allowed to a certain extent. However, the market does make a judgement call on whether they will allow the activity to continue once the ball is in motion.
There are many forms of strategies when it comes to trading on the stock market, and not all of them have nicknames like gather in the stops does. However, each strategy is executed with a goal or achievement in mind. To determine the best strategy to use, an investor must first determine what their end goal is. Based on that they can determine, on their own or with a licensed broker, the best way to achieve that goal.
An Example of a Stop Order
An example of a stop order would be if ABC Inc was trading at $35 each. An investor, wishing to purchase shares of ABC Inc, sets up a stop order with their broker. They state that once ABC Inc shares reach their stop price of $30 per share, the investor would like to purchase up to 15 of the shares.
The broker will keep an eye on ABC Inc and once the price reaches the desired $30 per share, the stop order will become a market order and the 15 available shares will be purchased on behalf of the investor at the market price of $30 per share or close to that level.
Imagine now that the shares of ABC Inc don’t drop down to $30 per share and instead climb steadily until they are hovering around $45 per share. The broker will not purchase these shares on behalf of their investor because they are not at the desired price.
