Online Stock Trading and Investing: An Introduction to Conditional Order Trading Strategies
Experienced traders understand that money and risk management, along with strict and disciplined use of stop losses, are the primary keys to survival and long-term profitability in the market; in fact, I think they are more important than the stock you buy.
The main advantage of going a step further and using ‘Conditional Order Trading Strategies is that you can go about your daily business, ‘safe’ knowing that if any stock or stocks fall to their predetermined levels, then your stop loss broker will act as a third party on your behalf and will close the trade if your default stop loss level has been triggered.
Some of the popular resource stocks have fallen wildly in recent weeks. Many experienced traders would have exited before the loss of open or capital gains became too great.
Others may have frozen based on my article at EzineArticles.com on “Difficulty Taking Stop Losses.” If so, they have subscribed to the BHP approach: they have bought and now they are waiting and praying frantically. When individual stocks or entire markets turn, they often turn quickly, so months of gradual growth can be wiped off the board in days, and sometimes hours.
In my articles, I teach the strategies of Jim Berg and others that incorporate using initial stop losses to protect principal and then trailing stop losses to protect open profits. We have discussed the use of various types of stop losses:
We have shown that in a rising bull market there have been times where the use of intraday conditional stops has resulted in a premature close of the trade, as some of these stocks rallied during the day and continued higher.
A trader using conditional stops at the time would have had two ways of looking at this:
i) The -ve point of view- the disappointment of being thrown out of the trade too soon
ii) +ve’s point of view: glad his insurance policy worked and protected him in the event of a sudden downturn.
For those who used intraday conditional stops in the past few weeks, their insurance actually kicked in as they would have gotten home from work (or the golf course, etc.) and found that many of their conditional sell orders if prices hit a certain value would have been activated. Their trades would have been closed out by their conditional stop-loss service, for example, as provided by DFS Equities, a licensed broker in Sydney.
The main advantage of using such a service is that you can go about your daily business, ‘safe’ in the knowledge that if any stock(s) fall to their predetermined levels, then they will act as a third party on your behalf: and close the trade.
For those who waited for closes below stop loss levels in recent weeks, they may have experienced a different level of excitement than their counterparts who use conditional stop loss orders and who closed their trades much earlier.
The real test then came for those who found their shares trading well below their limits. For the conditional stop loss user, he did not have to go through this test as his trades had already been closed days before. There are advantages to both approaches. The main lesson here is that each of us needs to determine, as part of our own personal business plan, whether to use:
Traders and investors who know they have a “freeze problem” can make the decision to use intraday stops regardless. They know from personal experience that they would rather have someone else act on their behalf at predetermined levels than go through the heartbreak of not being able to pull the trigger themselves when put to the test.
For those who choose conditional stops, keep in mind that there is significant risk in addition to the possibility of an early closing of the trade.
If there are very few buyers queuing up the ‘bid pile’, then there is a real possibility that there could be an unnecessary and artificial cascade of prices, caused by e-brokers’ computers dumping stocks in a domino effect in hundredths of a second and prices subsequently bouncing, often only minutes later as bargain hunters chase prices.
I wrote extensively about exit strategies and this topic in my original work for Daryl Guppy’s newsletter before Jim Berg and I started ours. These have now been republished in my ‘Atkinson-Guppy Articles’ e-book in which I called this phenomenon ‘avalanche selling’.
I showed that one of the main advantages we had found in using DFS Equities was that they provide a ‘hybrid’ service, so they have humans to place the sell order once the conditional stop activation automatic audible alarm is triggered. .
Their experienced staff can monitor the screen and see whether or not an automated flood sale is taking place, and then decide whether or not to place a sell order on your behalf, based on your instructions.
Max Lewis, an old friend of mine who founded Metashare International, really pioneered the use of conditional stop loss orders in Australia in the late 2000s. Conditional Orders (COTS)) is a “must read”.
