What follows is the exact steps to take once a stock is setup to enter – either for a buy or a sell short.
Note that many traders fail because they don’t wait for their specific entry conditions to be met. Too often, a trader will enter before a stock has traded in the intended direction. Big mistake! As a savvy speculator, your job is to wait for the lowest risk, most opportune moment. Then, and only then, will you enter a stock. Let’s get going!
First – where is the open?
Is the open outside or inside yesterday’s range? Where the open is determines whether or not a trade is even placed.
For a buy signal, if the stock opens above the previous day’s high, then NO TRADE!
When selling short, the exact opposite applies. There is no order placed if the stock opens below the previous trading day’s low.
Second – The open is inside yesterday’s range
For buy orders, a stop order goes above yesterday’s high. For sell short orders, a stop order goes below yesterday’s low.
If we have a stock setup to buy, that opens less than the previous day’s high, a buy stop order with a limit goes just above the previous day’s high.
As an example, on May 7th, 2001, Resmed signals a BUY. If the open on May 8th is less than $50.797, then a buy stop limit order is placed above the previous high.
Since the open on May 8th was at $50.000, a buy stop limit order is placed at $50.850 stop with a limit of $50.950.
A few hours into the trading day, RMD trades above yesterday’s high .
The buy stop limit order is filled at $50.900 . and it’s off to the races.
Third – If your order is filled, place a protective stop order
For buy orders, a sell stop order goes below the previous day’s low or today’s low.
For sell short orders, a buy stop order goes above the previous day’s high or yesterday’s high.
Note: Stop orders are Good-Till-Cancel with no limit.
Once a buy order is filled, a protective sell stop order is placed below the previous day’s low OR the current day’s low, whichever is lower.
Just the opposite for a sell short order. Once filled on the sell short order, a protective buy stop order goes above the previous day’s high OR the entry day’s high, whichever is higher.
Here’s why you use a NO limit stop order. I sold short Hewlett Packard at $30.000, placed a buy stop order at $31.500 with no limit, Good Till Cancel.
About a week later after the market closed, HWP announced “good” earnings. The next day, the stock opens above stop price. Since I didn’t have a limit price, the buy stop order became a market order. Notice I didn’t get filled at the opening price. I wasn’t so lucky. About ten minutes later, I was filled at $36.000. Ouch!
If I would have used a stop order with a limit, I never would have been filled and that would have been worse.
Fourth – Consider exiting the position at the end of the day if the position shows a loss
The trade setups we use are designed to enter a stock only when it is moving in the desired direction.
If we are buying a stock, then we are buying as the stock price is rising.
If we are selling short, the stock must be falling.
If at the end of the first day, the stock closes in the “wrong” direction, then we are probably going to lose money. No sense in waiting till the initial stop loss is hit. Take the small loss and move on.
Of course, this assumes the initial stop loss is not hit on the first day.
Let’s put it this way, the best trades work out immediately and do not give you a second chance to enter at the price you want.
(1) Where is the open? If it is within the previous day’s range then be prepared to enter the stock as it trades above the previous day’s high or low.
(2) For buying, use a buy stop with limit order just above the previous day’s high. For selling short, use a sell short stop with limit order just below the previous day’s low.
(3) If filled on the trade, place a protective stop outside the previous day’s range in the opposite direction of the intended direction.
(4) Consider exiting the position at the end of the day if the position is showing a loss.
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*** Article by Dave Wooding of the Wooding Trading Company. Dave’s site includes useful stock market trading information. Visit https://www.woodingtrading.com for more FREE information about how the stock market works, trading tutorials and stock market education. If you would like to receive information on a regular basis, simply sign up at https://www.woodingtrading.com/stock-market-newsletter. html
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