Greetings, fellow Pro-fundity team members -
2-26-99 Page Background music:

This week we begin the first of a three-part series on specific order strategies to take advantage of rolling stocks. Our first deals with the mechanics of placing orders with internet brokers (and some full-service tips as well). We will cover Market, Limit & Stop orders, how they can be combined, some red-flags to consider, how they are timed, and how your intestment style is factored in. Next week we will put them into action on current tickers showing how to investigate their value with paper trades, and the last segment covers the "So what?" What does it all mean to our investment ACTIONS!

If we could sit at a terminal all day with a direct connection to the floor of the market, carefully watching price movements, we wouldn't need special orders. We could take action as required. However, they become an important tool to help us execute strategies, to maximize timing, and to rid us of the task to monitor market activity continually. Additionally, they help us keep emotion from clouding many of our investment decisions.

To make them work for us, we need to understand what they can and cannot do. So, let's consider these issues now.

There are three basic types of orders; market, limit and stop.

1. Market - An order for the broker to immediately buy or sell at the next available trade. A market order guarantees execution but not a specific price. This is the simplest order for the broker to execute and may cost less, particularly with internet brokers.
   When we place a market order, we do not know the exact price. We've instructed our broker to act now to get the best buy or sell price available at the moment. We use this to sell a stock as soon as possible. This order will be executed at the available price at the time the order is received in the marketplace.
   
   
2. Limit - A price limit is specified, instructing our broker exactly where to buy or sell when the price is available. If the stock price does not become available at our limit price, the transaction will not be executed.
   
   Limit orders guarantee a price but not an execution. We place a limit on the amount we are willing to pay to buy a stock or the amount we are willing to accept to sell the stock.
   
   
3. Stop - A slight twist to the limit order is the Stop. This order, like the limit, will be executed only when the specified price has been reached. The difference, however, is that the stop becomes a market order when the stop price has been reached. The stop order is then a conditional market order. The action will be to buy at the lowest available price or to sell at the highest available price. This does not ensure the transaction will be made at the stop price.

1. Buy stop - If the price rises to $20, a market order is executed to buy the stock at the best price available. This may be at, above or below $20. [We buy when the price rises to our target] A buy-stop is always set above the market price.
   
   
2. Sell stop - If the price falls to $10, a market order is executed to sell the stock at the best price available. If the price gaps down dramatically the sell price may be well below $10. In either case, buy-stop or sell-stop, the order will be executed. [We sell when the price falls to our target] A sell-stop is always set below the market price.
   
   
3. Buy limit - If the price falls to $10, a limit order is placed to buy the stock at $10 if it is available. If the order is executed, we will get the stock at the limit price of $10. [We buy when the price falls to our target] This order is placed below the market price.
   
   
4. Sell limit - If the price rises to $20, the stock will be sold at $20 if a buyer can be found. [We sell when the price rises to our target] A sell-limit is placed above market.

1. Buy-stop: If we want to buy a stock that looks near its bottom, we can set a buy-stop at some level above the current price and buy in when it starts back up.
2. Sell-stop: We bought U.S. Steel (X) at $24 and it has gone up to $28. We think it is headed lower so we place a sell-stop at $27 to protect most of our profit. If the price hits $27, the sell-stop will trigger a market order for the next available price. It could be lower than $27. The play is called a Stop-loss, telling your broker to sell if the price falls to a certain level, in order to prevent further losses. This provides a degree of profit protection.
3. Buy-limit: We place a buy-limit order if the stock we want to buy is likely going lower. Here the broker will buy only when the price falls to the value we've named.
4. Sell-limit: Similarly, if we own a stock that's rising in value, we can place a limit order to sell only if and when it climbs to the pre-established price.

1. Buy-stop: A problem with all stop orders is they do not guarantee the execution price. If a stock spikes up, the buy trigger kicks in but by the time our order is filled the price may be much higher than we intended to pay.
2. Sell-stop: This play is called a stop-loss and we could suffer from what is called "whipsawing," (or being whipsawed). This is a rapid price movement followed by a sharp change in the opposite direction. We place a sell-stop order and it kicks us out of a stock at a certain price, then the stock immediately goes back up in price. We can get dizzy trying to chase a stock in these cases. Careful selection of the stop price becomes important to minimize this possibility. That is, we must use wisdom in deciding how far from the current price to place the stop. This of course depends on the volatility of the selected stock. Similar to the buy-stop above, if the stock gaps down, by the time our order is filled we may sell for a lot less than we planned.
3. Buy-limit: While the intent here is to buy into a better position on a stock, having the broker buy when the price falls to some target can be counter to reason. While the stock is going down, that may be the wrong time to buy.
4. Sell-limit: Similarly, to sell when the stock is on the rise may sound at odds with reason. There are occasions when it is prudent to sell into strength, with the stock on the rise, but a lot depends on particular objectives. With rollers we may suffer some disappointments selling with the stock on an up-tick. The next editorial deals with this specific issue with methods to minimize this problem.

1. Day: A day order is just that, it simply expires at the close of trading on the day it was entered. All market orders are day orders.
2. Good until cancelled (GTC): The orders herein considered require time for prices to advance or decline. To keep the order active for many days or weeks, we use the GTC. Check with your own broker to see how long they will allow a GTC order to remain active. 60 days is common but may be more or less. Red Flag: If a GTC order is filled over several days when there are not enough shares available to fill at once, we get charged a commission on each day's transaction.
3. All or none (AON): To prevent the problem noted with GTC multiple commissions, we can specify the order is to be executed only if all the shares can be executed at once. Red Flag: Placing a condition on the order may prevent us from buying the stock. AON are low priority orders.
4. One cancels the other (OCO): This order tells the broker to execute only one of two possible transactions. For instance, if we want to sell when the price rises to $12 but protect our downside with a stop at $4, we place a sell-limit at $12 and a stop-loss at $4. The first order to occur will cancel the other automatically. When this option is available, some creative stop/limit combinations are possible. Internet brokers do not usually provide this order type. Their computer systems will not accept two orders for the same stock. The danger is the first part of the order may sell the stock, then the second order could be triggered with no shares in the account. One broker would accept such an order with the understanding (written & documented) that I was responsible for selling short if it came to that. Other responses have said simply, "not allowed in our industry!"
   
   A full service broker handles this transaction manually, canceling the other when the first order fills. That is some of the service we pay for in an FSB.
   
   

1. Buy & hold strategists will tell us to use market rather than limit orders in most cases. Rather, identify stocks with good fundamentals & positive technical signals and the stock price should be moving steadily higher. A limit places unnecessary conditions on a purchase, like "don't pay more than $42, etc." Nitpicking over fractions of a point may keep us out of a good stock.
2. A short-term trader will usually stick with limit orders, defining the exact price for an execution. I've heard them refer to market orders as a license to steal!