USEFUL TIPS

There is a series of free trading lessons, which consists of 10 topics that traders, both beginners and experienced traders, should find them very useful.

The 10 Free Trading Lessons will cover the following topics:

(1) The importance of psychology in price movement.
(2) How to spot mega trends.
(3) Understanding of technical price objectives.
(4) How to picture price objectives.
(5) How to trade with moving averages.
(6) How to use point and figure trading techniques.
(7) How to use the RSI indicator.
(8) How to correctly use stochastics in your trading.
(9) How to use the ADX indicator to capture trends.
(10) How to capitalize on natural market cycles.

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Sunday, February 21, 2010

Conditional / Contingent Order – Part 2: Examples

Go back to Part 1: How It Works.

Examples of Conditional / Contingent Orders:

Example 1:
Stock XYZ has been trading in a range between $30.00 and $35.00. You want to place a buy order to buy the shares of XYZ when the stock has broken out the range and show upward price movement. You can place a contingent order and set a condition that when the price is trading at $35.20 or above (Trigger Price >= $35.20), place an order to buy XYZ at $35.30 (i.e. Limit Order with Limit Price $35.30).
Suppose when the market opens the next day, XYZ opens at $35.25, the order will be triggered and sent to the market as a Limit order. The order should be executed at a price around $35.25. Basically, the order will only be filled with the price $35.30 or lower.
However, suppose stock XYZ opens at $40.00, the order will be triggered, but it won’t be executed as the price is higher than the Limit Price. Hence, this can prevent you from buying more than the price that you’re willing to pay.

Example 2:
Adding to Example 1, suppose that in order to ensure that there is also sufficient momentum leading to the price breakout of the trading range, you also want to specify a minimum volume target of 300,000 units traded.
In this case, if the price increase to $35.20 or above, but only 200,000 units are traded that day, then your order will not be triggered.
Only when both the price is $35.20 or above AND the volume traded on that day (i.e. all units traded on the day the price is traded at $35.20 or above, including units traded at both above and below $35.20) is 300,000 units or more, the Limit order to buy stock XYZ at the price $35.30 or below will then be triggered and submitted to the market.

Example 3:
You own Call option contracts of stock ABC and would like to sell the options if a certain market index falls below 10,000. You can place a contingent order and specify a condition that if the market index drops to below 10,000, your order to sell will be triggered and sent to the market.
In this case, you can choose to have Market Order, Limit Order, Stop Order, or Stop Limit Order to be sent to the market when the condition is met.
Remember that since the security you will be selling is options, when you place Limit Order, Stop Order, or Stop Limit Order, the Limit Price or Stop price you specify must be the options premium, not the stock price.

Example 4:
You’ve observed that normally when stock price of ABC drops, stock XYZ would also drop shortly after. Currently, stock ABC is trading in the range of $15 to $18. You expect that the stock ABC will fall and break down the trading range. When that happens, you wish to buy Put options of stock XYZ.
You can place a contingent order and set a condition that if the stock price of ABC falls to or below $14.80, your order to buy Put options of XYZ will be triggered.
Likewise, you can choose to have Market Order, Limit Order, or even Buy Market-If-Touched (Buy MIT) or Buy Limit-If-Touched (Buy LIT) Order (if available) to be sent to the market when the condition is met.

Example 5:
You have short sell stock PQR at $20.00 and wish to buy it back to take profit when the price has fallen to $18.00 (your profit target). In addition to the price condition, you also want to set a minimum traded volume before the order can be triggered.
For this purpose, you can place a contingent order and set a condition that if the stock price of PQR has fallen to 18.00 or below and at least 100,000 units of PQR are traded, your order to buy (back) the stock will be triggered. You can choose to have Market Order, Limit Order, Stop Order, or Stop Limit Order to be sent to the market when the condition is met.
In this case, if the price falls to $18.00 or below but only 90,000 units are traded that day, then your order will not be triggered.
Only when both the price is $18.00 or below AND the volume traded on that day (i.e. all units traded on the day the price is traded at $18.00 or below, including units traded at both above and below $18.00) is at least 100,000 units, the order will be triggered and submitted to the market.

For the list of other types of order, go to: Types of Orders in Trading.