Entries and exits are a critical part of trading … they can be the difference between a winning trade and a losing trade…
Or between an average trade and your best trade EVER!
So how can you make the most of this critical trading component?
You can use a tool with options that are built into every broker.
Using these can be especially useful for part-time traders and those who struggle to exit a losing position.
But there are so many different types — you must know what each one does and when to use it…
That’s what I’m breaking down today…
Five Order Types and When To Use Them
There are all kinds of order types you can use. But there are four or five common ones you must know and can focus on.
So many new traders like to use market orders because they have FOMO. They just want in. They don’t care about the price or waiting for a good entry.
Do yourself a favor and avoid market orders at all costs.
Limit orders are the type of order every trader should use to get the best potential entries and exits.
If you put in a limit order, you won’t pay more than your limit price.
If the stock hits your price and reverses lower before your order is filled, you might get a better entry, but you won’t pay more.
It’s the same if you use this type of order to sell. If you have a position and put in a limit price to sell, your order will execute at your limit price or better. If it blows through your sell limit price to the upside, you could get executed at a higher price.
But let’s say you have a limit order to sell at $3 and the stock hits $2.99 and reverses lower … Your order won’t fill but you can still adjust your order and the price manually.
You’re still in control of how much you sell for. You’re not at the mercy of the market makers like you would be if you used a market order.
Stop Limit Orders
Stop limit orders add another level to your limit order. I prefer to call these stop-trigger orders. Because with this order you enter two prices — one is your stop price or trigger price, and the other is your limit price.
Your stop is the price that triggers the limit order to buy or sell.
I like to use this type of order to enter long positions. If you have to step away from your computer, this order can execute and enter a trade for you. Here’s how it works…
Say you want to buy a stock if it breaks the high of the day at $3. You can place a stop price at $2.95 and when that price is hit, it sends or triggers your next order to buy if the stock hits $3.
But you won’t pay more than $3.
If you use this order type to sell at $3, you would set your stop price at $3.05 and your limit price at $3, so you won’t sell for less than $3.
This can work great for fast-moving penny stocks because you place your stop price before your limit price so it has a buffer to trigger and execute. That way it’s less likely that your limit price will get blown through without executing.
Stop-loss orders are the most common order types traders use to exit a position when a stock hits their risk level.
It’s similar to the stop limit order but you only enter one price that triggers a sell order. With a stop-loss order, you’re telling your broker to get you out at any price after your stop price is hit.
If your stop loss is set at $3, your order will trigger when the stock hits that price, then your order becomes a market order and could execute at any price below $3.
A trailing stop-loss order follows the stock as it climbs higher. It can help you lock in profits at a higher price, rather than setting one stop loss order at your risk level and losing out on potential profits.
This order type is good for trades you don’t want to micromanage — like a swing trade.
Say you’re in a long position on a morning red-to-green move. The stock continues higher and you have a nice gain. But you think it can go higher over the next few days…
You can set a trailing stop loss order, say 5% from the stock’s recent high. And if the stock dips 5% from the recent high, it executes a sell order and you’re out.
But if the stock goes higher without hitting your stop, the trailing stop follows it up, always staying 5% below recent highs.
This type of stop isn’t good for volatile day trades. The stocks have too much range and wild price moves.
Trailing stops are best to use on slow-moving ‘real’ stocks and are more useful for swing trade positions.
Day traders and swing traders should get familiar with all order types and when to use them.
They’re especially useful for part-time traders who can’t micromanage their positions all day.
Hope this helps you determine the right order types to use to get the most out of your trading this year.
Have a great day everyone! See you back here tomorrow.
Lead Trainer, StocksToTrade