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Stop! Know your trading orders.

Here are a few suggestions for using orders—such as limits—in today’s shifting markets.

  • Fidelity Active Trader News
  • – 03/14/2014
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The crisis in the Ukraine—in addition to unusually inclement weather across much of the U.S.—may warrant making greater use of trading orders now, if you aren’t already doing so.

These simple, yet powerful, tools can help manage your risk and more effectively implement your strategy—for any kind of market volatility.

Big price swings recently

During early March 2014, the market experienced relatively sizable day-to-day price swings. For instance, the Dow climbed 200 points on March 4, one day after dropping 154 points on rising geopolitical tensions in the Crimea region between Russia and the Ukraine.

While Russia accounts for only 2.9% of global GDP (and the Ukraine just 0.4%), global instability anywhere around the globe can cause markets to gyrate. To be sure, energy market disruptions are a major concern here as Russia is a major supplier for all of Europe.

Before that, inclement weather across the U.S. contributed to some choppy trading. Stocks hit a 2014 low in early February, due in large part to concerns about the economic impact of snow and freezing temperatures. Here’s an interesting statistic: In the month of December alone, nearly 100,000 more U.S. workers than in the four previous years' average did not go to work due to the bad weather.

For investors, these external market factors can have a real impact on your profits and losses. Looking ahead, what might the spillover impact be? Consider this in regard to the weather factor: Since 1949, the annual percentage change in real GDP has tended to bounce back sharply after cold winters (see chart below). To wit, after an unusually cold first quarter, second quarter growth has historically more than doubled. Could this potentially result in some positive daily swings?

The point is that if these external market factors cause some unusual trading activity, orders can help you manage your risk and better position your trades.

Putting trading orders to use

How to enter trading orders

When you are making a trade, you will be prompted to select an order type after selecting a symbol, action (buy, sell, etc.), and quantity. Market orders are a commonly used order when you want to immediately buy or sell a security. A limit order makes price the priority.

If you are concerned about the ongoing market impact of the crisis in the Ukraine, among other risks, you may want to consider tightening your stops on open orders. This strategy involves adjusting stop orders so that they are closer to the current market price (in order to potentially reduce the impact of a large, adverse price swing). If the conflict dissipates, you can adjust and loosen up your stops.

Generally speaking, if you are looking to have a little more control over your positions, you may want to consider nonmarket orders (see sidebar). Limit orders are a primary alternative and can be particularly useful when market volatility is on the rise. However, setting a limit order can take some finesse.

A buy limit order is usually set at or below the current market price, and a sell limit order is usually set at or above the current market price. The price at which you might set a limit order above or below the current price can depend on a number of factors, including the level of volatility in the market and the specific characteristics of the security you are trading.

More than limits

Advanced conditional orders

In addition to basic order types, there are a number of more advanced, conditional orders that you may want to consider implementing, if appropriate for your strategy. They include One-Triggers-the-Other (OTO), One-Cancels-the-Other (OCO), and One-Triggers-a-One-Cancels-the-Other (OTOCO).

There are a number of other order types that can help you manage your positions. One thing to be aware of when it comes to limit orders, for example, is that it may be filled in whole, in part, or not at all, depending on the number of shares available for sale or purchase at the time. It might make sense to place additional conditional orders. Choices include:

  • Fill or Kill (FOK). A FOK order mandates that if the order is not executed immediately, it is canceled.
  • Good-'til-Canceled (GTC). A GTC order keeps the order open indefinitely until it is executed or canceled.
  • Immediate or Cancel (IOC). An IOC order is a limit order set at a limit price you specify. All or only a portion of the order can be executed. Any portion of the order not immediately completed is canceled.
  • All or None (AON). An AON order is a condition that mandates either the entire order is filled or no part of it.

Investing implications

If your trading strategy is working for you, then carry on. But if you aren’t making use of trading orders, you may want to consider doing so. While triple-digit price swings aren’t unheard of, the ups and downs of 2014 thus far may warrant more actively managing your positions. Trading orders can help you accomplish this goal.

Learn more

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Stock markets are volatile and can decline significantly in response to adverse issuer, political, regulatory, market, or economic developments.

Past performance is no guarantee of future results.
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