Learn the Best Type of Order to Execute in Any Situation
We’ve already talked about how to open a trading account and understanding the stock market so you can take advantage of how a stock is trending but now it’s time to start making trades. If you’ve ever traded a stock you’d know there’s more than one type of order. After all the research you’ve put into figuring what company to buy and when to buy it it would suck if you messed it all up because you didn’t know what order type you’re making.
There’s a strategy to everything. Buying shares of a company is no different. Personally, I like to set my orders up so I buy when the stock hits a certain price and follow up when the same stock hits another price. This ensures I don’t get greedy (like I did with Fitbit) and end up losing all my profit when the stock plummeted.
Normally you buy enough shares to cover the cost of trading while still making a decent profit. To ensure that you come out on top put in an order to sell whatever stock you own once it hits a certain price point. That way it’ll ensure you made X amount of dollars off your trade.
There’s a bunch of options when it comes to buying and selling shares which help you make sure you don’t lose an insane amount of money by automatically closing the trade when things get bad. The same strategy can also be used to lock in your profit if and when the stock you bought reaches a certain dollar amount. You can take advantage of each type of order to ensure you make the best decision while trading.
A limit Order guarantees that your trade will be made at whatever price you specify or better. It sets the maximum or minimum you’re willing to buy or sell a particular stock. Let’s say you wanted to buy GoPro at $7.50 but its current price is $8. A limit Order would be only be executed if and when GoPro dropped to $7.50 or lower. In addition to that, you can set the Limit Order to sell once GoPro hit $8 to ensure you make money off the trade. The downside is there’s a chance your order might not be filled at all if your desired price isn’t reached.
A Stop order is very similar to a limit Order and will be executed only when the security you want to buy or sell reaches a particular price which is known as the stop price. Once that price has been reached it essentially becomes a market order and is filled. Stop orders are useful when you want to automate your trading. Stop limits are often used to limit losses or capture profits during price swings. The disadvantage of stop orders is that they may be activated by a fluctuation in the stocks price rather than when the stock is more stable. This means there’s a risk that a buy or sell can be triggered at an inopportune time.
Stop Limit Order
A stop limit order is a combination of a limit and stop order. When a stock you want to buy or sell hits the price you designate or better it triggers the stop limit order.
Setting this order up involves setting 2 price points. The first is setting the stop price just like a stop order so it takes action when a certain price is reached, the second number is the limit which means no action will take place outside the limit parameters you place. You have complete control over when your order will be filled so you can buy and sell at the best price. The downside is the same as placing a limit order, there’s no guarantee your order will get filled.
A trailing stop automatically tracks the direction of a stock and automatically triggers a sell once your share hits a certain monetary amount or percentage in the other direction.
Let’s assume you bought Fitbit for $5 a share. A 10% trailing stop means if Fitbit drops more than 10% you were wrong about your investment and you cut your losses before you lose more. You could also set your trailing stop to occur when Fitbit reaches a certain dollar amount. If it drops to $4 it stops your losses in the same way it would have with the 10% example above. You just have the chance to specify with a dollar sign rather than a percent.
Let’s say this same $5 share of Fitbit increases to $10 but then drops 10% to $9. That 10% turn triggers the trailing stop which locks in your profit before the share trends downward again.
When we have a bunch of options and don’t know what they mean it makes it harder for us to act with confidence. Hopefully, this helps you get started trading and making the highest return on your investment.
Question: Whats been the most confusing thing to you about investing? Leave a Comment below.