How to conduct transactions and not fall under the sales limit.
You can make three types of transactions with shares on the stock exchange:
- Buy a stock, meaning open a long position (Buy Long).
- Sell the stock that you have, meaning close the long position (Sell).
- Sell a stock that you do not have, meaning borrow it from the broker and sell, thus opening a short position (Sell Short).
All these actions are carried out thanks to orders that you place in the broker's terminal (less often over the phone). Thus, an order is a request for a broker to buy or sell the desired number of shares. The most common types of orders are:
- Market Order
- Limit Order
- Stop Order
- Stop Limit Order
- Trailing Orders
Any order contains the following information: price; type of security (or currency, or futures); type of contract: buy or sell; volume (number of lots); order type: market or limit; time of execution. For the time being let's examine two of them: sell limit and sell stop.
What is a sell limit? It is in itself a standard pending order to sell an asset at a set price. A trader places this type of order if they want to sell a certain asset volume at a higher price than the current market price. Such an order implies selling an asset at the highest price and then closing the position by buying a lot of the appropriate size of the same asset. Sell limit is best for correction of the bearish trend, with a bounce from the resistance level and from the upper border of the price channel.
Sell limit is set in case a price increase is predicted with its subsequent decrease, the sale occurs at the price peak and the position should be closed by buying the asset in the same amount but at a lower price. In order to successfully set the sell limit, you should analyze the price minimums and maximums and, based on the data obtained, determine the opening and closing points of the position. You can close this position manually or by placing a take profit, in which case the position closes when it reaches the set amount of profit. A stop loss is used as a safety net to reduce risks; it should go off if, contrary to expectations, the price will continue to grow after opening the sell limit.
What is a sell stop? It is an order to sell in case the price falls below the current price level. This type of order is based on the fact that, given a certain drop in the general price level, its movement will continue in this direction. Sell stop is best used when there a turn of the bull trend, a break of the support level and the lower border of the price channel.
A sell stop order is set if a trader is certain in the chosen strategy and does not base their statements on guesses but on reliable technical analysis data. Opening positions using this type of order is quite risky and requires mandatory installation of stop loss orders. It will not be excessive to also set take profit; this will close the position with profit and without your participation. Usually this happens after the break of the support line taking into account that the trend does not change its movement but continues to move in the given direction.
A trader should remember these three important statements
- 1Any order is a day order. It is valid for the current trading day and is automatically removed if it was not executed.
- It should be understood that you are not alone in the market. There is always a queue of buyers and sellers. All orders are executed according to when they were filed.
- Orders containing non-standard lots are executed last and if there is an order of equal amount on the opposite side (therefore, order with non-standard lots sometimes have to wait for a long time).
Practice trading with pending orders on your demo account and be sure to add this tool to your trader's arsenal.