It’s not always possible for a trader to sit in front of the computer and have their eyes glued to the screen. Whether it be work or meetings or chasing after kids, life gets in the way of watching stock charts and waiting for the right entry that lines up with a chosen strategy.
Fortunately, many brokers provide a range of tools and automatic order types that make it possible to “set and forget” the perfect setup. While some firms like Interactive Brokers also have paper trading accounts that allow traders to learn and test its numerous order types with a dummy portfolio.
With any stock, prices are determined by the volume depth of its bid and asking prices. Bid prices show those traders willing to buy a stock, while asking prices show those willing to sell. And depending on the volume of these buyers and sellers, the price paid or received for a new trade can vary wildly from the current trading price at any point in time.
For this reason, customer order types can give traders an enormous degree of control over the scenarios and prices for which they buy or sell a particular stock.
Standard order types include a market order which will execute a purchase or sale at whatever price is available. Unless the trader is desperate to complete the trade, this is generally not recommended, given the potential for huge price differentials. While a limit order allows for a specific price limit to be set, which will ensure a buyer does not pay any more for a purchase, and a seller does not receive any less for a sale.
Custom order types take things a step further. Where a trader wants to wait for a particular chart formation to occur or a specific price to be hit before initiating a trade, with a stop-limit order, it is possible to set a “trigger price” at which point buying would commence, along with a limit price that will then cap the price paid. This allows for trading strategy signals to be fulfilled before making a purchase, whilst also protecting the trader from paying more than they wish to.
With any luck, a profit-taker order that is attached to a purchase will ensure that the desired price to sell a profitable position is executed. But what if a purchase is carried out and then the stock price collapses? Stop-loss orders make it possible to set a minimum selling price for the subsequent sale of any new purchase, should the price fall severely after buying. In addition, should this minimum selling price be triggered, it is also possible to limit the lowest possible selling price. This is an ideal option to protect against a grossly abnormal fall, where selling the stock for such a low price would not be ideal, and rather it warrants further investigation of other factors or news.
In addition to these useful orders, many brokers have a wealth of customization options to help ensure traders can execute any strategy they wish, without being tied to the desk. Furthermore, this effective automation even takes the emotion out of executing the ideal trading plan.