Jun 13, 2016
Personal Investor: How to buckle up for a bumpy summer market
By Dale Jackson
ANALYSIS: With Britain threatening to exit the European Union and a shock and awe U.S. presidential election campaign on the horizon, it seems we’re heading into a crazy summer for global stock markets.
Summer is also normally the time we pay less attention to our investment portfolios, which means we can either stay anchored to our trading accounts or set conditional orders.
Most brokerages allow clients to set conditional orders at no extra charge. They are ideal for limiting losses in a market selloff or locking in gains when they rally.
Stop-loss
The most basic conditional order is a stop-loss, which is set below a stock’s purchase price. For example, if a stock purchased at $10 has a stop-loss placed at $8, losses will be capped at $2 a share. Stop-loss strategies vary and are just one of an arsenal of conditional orders that give do-it-yourself investors the ability to pre-program their entry and exit strategies.
The real skill on conditional orders is where to set them. If you place them too close to the trading price they could be triggered by volatility unrelated to the specific security.
In addition to losing a potentially lucrative position, investors could rack up unwanted trading fees.
Exactly where to place an order in relation to the trading price is up to the individual investor. You can choose whatever feels right, using target prices and trading ranges from fundamental analysis, or pick support and resistance levels from technical charts.
As a rule of thumb traders generally set orders within 10 per cent of the current price.
Other conditional orders
Investors can go a step beyond risk management and employ opportunistic strategies with buy and sell orders. One strategy is to adjust a stop-loss order as a stock rises.
The trailing-stop is one popular conditional order that utilizes the latest trading technology. As a stock rises the trigger to sell automatically moves up in proportion to the real-time price - like a moving stop-loss. In addition to locking in gains, a trailing stop locks in bigger gains as the stock rises.
There’s another strategy for bargain hunters who love a stock but refuse to pay a high price. Investors can "lowball" the market through an open-limit order.
It's important for retail investors to be aware that conditional orders are even more vital for short positions, where there's no limit to how much a stock can rise. In such a case, a buy-stop order can limit losses or lock in profit.
Limits on conditional orders
It's important to note that, in most cases, orders expire after 30 days, and if you don't keep track your investments may not be protected. Also, conditional orders are not always precise. If a stock is in freefall the order will trigger, but there's no certainty where it will hit. That's why it's important to place orders only on stocks with plenty of trading volume.
Most online brokerages offer instant alerts via e-mail when an order is triggered. Investors who are ready to convert to conditional orders can often sign up for tutorials or seminars through the brokerage website.
Dale Jackson is BNN's Personal Investor. Follow him on Twitter @DaleJacksonPI
