Stock Investing For Dummies, 5th Edition - Paul Mladjenovic (2016)
Part IV. Investment Strategies and Tactics
Chapter 18. Using Trade Triggers and Advanced Conditional Orders
IN THIS CHAPTER
Using various types of trade triggers
Understanding and placing advanced conditional orders
In the age of knowledge, grasshopper, we must be one with the technology. Especially, locust, when technology can help you make more profit. In that spirit, uh … cricket, I take the topic of brokerage orders from Chapter 17 to another level.
Brokerage orders that you can automate on a website are (in my humble opinion) one of the greatest uses of technology. Chapter 17 is about placing single transaction orders, such as a stop-loss order or a trailing stop. In this chapter, I introduce you to more advanced brokerage orders, whereby it’s possible to enter a combination order containing two or more orders that may be triggered by market events (this stuff is cool …).
No one says that you need to use a trade trigger or an advanced conditional order. For most folks (even yours truly), the basic orders that I describe in Chapter 17 suffice most of the time. However, it’s good to know that if you encounter a challenging situation (or an optimal market opportunity) due to market conditions and/or your changing preferences and circumstances, you can structure an order or a set of orders to satisfy your investing/trading/speculating needs.
Trying Trade Triggers
A trade trigger is any event that sets a trade in motion (stock or otherwise). The trade trigger can be a singular event (such as the movement of an individual stock) or a market-wide event (such as a major index reaching a certain level). You use trade triggers to make something automatically occur, such as the selling or buying of stock shares when a particular price level is reached. Essentially, trade triggers carry out the function of “if this happens, then do that.” If a trigger is, well, triggered, the trade is deployed, and the stock trader receives an email notice as soon as the transaction is done.
Those who trade (versus invest in) stocks use trade triggers regularly to keep from constantly monitoring the daily swings in market movements. Most brokerage firms offer this technology for frequent traders.
In the following sections, I explain the different types of trade triggers and provide pointers on how to set one up.
Surveying different types of trade triggers
I think that trade triggers can be extremely useful to stock investors (and those who do options and/or track indexes). The following sections cover the three different types of trade triggers.
Using a stock
Chapter 17 gives you the scoop on basic triggers such as limit orders. A buy limit order, for example, says that “if and when XYZ stock hits the price of $50, then buy 100 shares.” And usually a time is attached, such as “this order is good for the day” or “this order is good-til-canceled.”
However, a more sophisticated trade trigger can be set in motion by a separate event that’s not directly associated with the movement of a particular stock. The trade trigger may be the movement of an entirely different stock. It may be one you own or one you don’t.
With trade triggers, the activity or attributes of any stock can trigger an order for another stock. If you feel there’s a correlation between the prices of two different stocks, you can set up a trade trigger similar to the one in the following example.
Say that you want to buy 100 shares of Apple (APPL) stock, but only when Google’s (GOOG) stock price falls to $700 per share within the next 30 days. The trade trigger would be set to “buy 100 shares of APPL when GOOG is equal to (or less than) $700, and this order will be GTC (good-til-canceled) but will expire 30 days from when the order is entered.”
As you can see, your creativity can take you to new levels of investing nirvana (whatever that may be!). Use triggers such as these when you come across opportunities in your favorite stocks. Do your research on stocks that you would like to buy; start with Chapter 6 and also use the resources in Appendix A.
Using an index
Investors can make a buy or sell trade using a major market index (rather than a stock) as the trigger. If you feel that certain movements of indexes may influence or correlate to the movement of individual stocks (or options), you can set up a trigger to place an order if the conditions you specify are met. Indexes include the Dow Jones Industrial Average (DJIA) and the S&P 500; see Chapter 5 for details.
You can do a sell order on a particular stock, for example, which is triggered when the Dow rises to a certain level. Or if, say, the S&P 500 index is reflecting a strong rally and you think it will be overbought when it reaches, say, 2050, you can set your order to sell a stock when this index reaches that level.
Very frequently, major market movements set up buying or selling opportunities in the stocks that you’re following. The idea that you can automate the process with trade triggers is very appealing. The timing is entirely up to you, but Chapter 17 (on brokerage orders) can come in handy for setting up your scenarios and related trade triggers.
Using an option
Call and put options can also be part of your trade trigger strategy. Options are speculative vehicles that have an expiration date, where you’re betting on the direction of an underlying asset; you buy a call option if you’re “betting” that the underlying asset will go up, and you buy a put option if you’re “betting” that the underlying option will go down. (For more information on options and how to use them, go to the educational sections of websites such as www.cboe.com and www.888options.com.)
For instance, say you’re bullish on XYZ stock (the world’s most famous noncompany!). You’d like to buy a call option but only on a day when XYZ is down so that you get a favorable price for the call option. Say that XYZ is at $70, and you’d like to buy a call option when the price dips to $65.
Perhaps the particular call option you’re eyeing (say it’s “XYZ $67.50 call option”) is priced at a premium of $175. (This would be quoted as a premium of $1.75 because a single option is based on 100 shares; therefore, a multiplier of 100 is in the price.) But you want to buy it for $150 (quoted as $1.50) or better. You would set your trigger as follows: When XYZ stock goes to $65 or better (meaning that the stock price hits the price of $65 or lower — that $65 price acts as the trigger), buy XYZ $67.50 call option at the specific price of $1.50 or better (meaning that you would be glad to purchase at a price lower than $1.50).
If XYZ stock does indeed fall to $65, your broker would enter an order at $1.50 (this would specifically be called a buy limit order). When (and if) the particular call option falls to the price of $1.50, a purchase would be made, and you would end up buying that call option for $150 (plus commissions).
Entering trade triggers
So you’re excited to use a trade trigger, but how, exactly, do you enter one? Every brokerage firm has the glossary and tutorials necessary to guide you through the process of placing an order. The main components of the trade trigger order are
· The order action: Is it a buy or sell order?
· The order type: Is it a market order, a stop-loss order, or a limit order? See Chapter 17 for more information.
· The quantity to be bought or sold: 100 shares? More? Less?
· The symbol of the security to be bought or sold: This one’s self-explanatory.
· The limit price and/or activation price for the order: This may or may not be applicable based on the type of order selected.
· The expiration for the order: Is it a day order or good-til-canceled? See Chapter 17 for details.
Keep in mind that not every broker performs these transactions the same way or labels these orders as I do. Speak to your broker and discuss this list with him.
Here are a few more handy hints for establishing a trade trigger:
· A trigger alert can be activated by a variety of sources. For example, you can have a trigger alert occur when a major market index, such as the DJIA, hits a certain level. Or, these alerts can be based on a particular stock that’s on the New York Stock Exchange (which includes the old American Stock Exchange), Nasdaq, the Over the Counter Bulletin Board (OTCBB), or even the “Pink Sheets” (where you find small cap and micro cap stocks).
· Some brokers can get very sophisticated with trade triggers, while other brokers may not do them at all (yet). Talk with your brokerage firm’s customer service department to see what triggers are available for traders and investors to use.
· Triggers on stocks and options are normally activated during regular market hours (9:30 a.m. to 4:00 p.m. ET).
· Talk with your broker about how long the triggers will stay on (until the triggers are activated or until they expire). Some brokers may have different time frames from the usual good-til-canceled time frame. The broker will usually send you an email if the trigger is activated or if it expires.
· If the trigger involves the purchase of a security, make sure that you have either enough cash for the order amount or enough margin to cover the purchase (see Chapter 17 for details on buying on margin). Do a tally of the total amount you need — a combination of triggers or conditional orders may involve more than one purchase.
Considering Advanced Conditional Orders
Advanced conditional orders let you combine two or three orders that, if filled, will either cancel or trigger additional orders. Conditional orders are available for both stocks and call or put option orders (make sure that you’re approved for options trading by your brokerage firm). In the following sections, I list different kinds of advanced conditional orders and explain how to place them.
Checking out different types of advanced conditional orders
Imagine saying to yourself, “Gee, I’m committed to my current stock, Stock A, and I hope it continues to go up. I’d love to get Stock B, but the only way I’d buy Stock B is if Stock A were crashing and I sold it because I lost hope in its future.”
It’s kinda like being at the supermarket and saying, “I’ll buy the veal only if the beef isn’t on sale, but if the beef is on sale, I’ll get that” (unless it’s Tuesday, which is chicken day, of course). Well, you get the point. Sometimes the situation (whether in the stock market or just real life) is a combination “what if/then that” scenario.
The following are three of the most common advanced conditional orders that you’ll encounter:
· One cancels another (OCA) order: In this case, you actually submit two simultaneous orders. If one is filled, the other is automatically canceled. Say you want to buy one of two stocks but not both. With the OCA order, you can do that because filling the order to buy Stock A will automatically cancel the order to buy Stock B.
· One triggers another (OTA) order: If this order is filled, another order is automatically and subsequently submitted. Say you have a stock (Stock A) and would like to buy another stock (Stock B) but only if you can use the purchase money from the proceeds from the sale of Stock A. The OTA order says that if Stock A hits a certain price, sell Stock A and then subsequently buy Stock B.
· One triggers two (OTT) order: If this order is filled, it automatically submits two subsequent orders. Say you own a stock (Stock A) at $50 a share, and you’re worried that it may fall below $48. You would like to buy Stock B at $45 and then enter a stop-loss order for Stock B at $40. The OTT order would sell Stock A when it hits $48 and then enter two subsequent orders: Buy Stock B at $45 and put a stop-loss order on Stock B at $40.
As you get more knowledgeable and confident in your investing pursuits, you may want to try the following advanced conditional orders, which build on those in the preceding list.
· OT/OCA: One order triggers an OCA order. When you submit an order and it’s filled, two orders are simultaneously submitted. If one of the second set of orders is filled, the other one is canceled.
· OT/OTA: One order triggers an OTA order. When you submit an order and it’s filled, another order is subsequently submitted, and if that second order is filled, a third order is subsequently submitted.
· OT/OTT: If one order is filled, it automatically submits two subsequent orders simultaneously. Oh yeah … you can get crazy with this stuff. (Keep in mind that every broker treats these orders a bit differently, so check with your broker to get the specifics.)
I guess the only order left is the OT/DOA (don’t ask — just kidding).
Placing advanced conditional orders
Although advanced conditional orders may seem complicated, like anything else, they become easy as you break down the process.
Before I get to the actual process, note that you need to set clearly in your mind what you actually want to occur and what possibilities you want to take into account long before you talk to your broker or head to your broker’s website to create the orders. You may want to write down your thoughts as clearly as possible.
Some of these steps will vary because every brokerage firm runs things a little differently, but the essential steps should be the same.
1. Choose the security.
In this order, are you trading a stock, exchange-traded fund (ETF), or option?
2. Search out the symbol.
What is the symbol of the stock or ETF (or option)?
3. Choose the quantity.
How many shares of the stock or ETF do you want? Or how many option contracts?
4. Figure out the basic order type.
Is it a market order, limit order, or other type of order? (See Chapter 17 for details.)
5. Check the condition.
Indicate that this order is conditional.
6. Check the “What if” operator in your order.
Did you mean “greater than or equal to” or “less than or equal to”? Check with your broker to be sure your order does exactly what you intend for it to do.
7. Choose the second security.
Repeat Steps 2-6 for this security.
8. Choose the third security.
Repeat Steps 2-6 for this security.
9. Set the cancellation condition.
Under what circumstance should the order be canceled? Say you want to buy XYZ stock when it hits $50 but not above that price. In that case, you set the cancellation condition at $50.
10. Set the time factor.
Specify that the order(s) is good for a day or provide an expiration date.
11. Review and confirm your order.
Lastly, review that the order is structured to your specifications. Not sure? Cancel and try again!
Your success with trade triggers doesn’t mean you need to master all the different types that I mention in this chapter. However, it’s good to master at least one or two to make your trading and investing more successful.