Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
Government's Biofuel Timetable Could Spell +15,900% Growth
+15,900% growth might seem far-fetched... but it's not. In fact, it
is mandated by law. And I've identified the ONLY stock positioned to
capture this growth.
The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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"BUY ON
STOP WITH A LIMIT" ORDERS
Initially, my plan for this week was to continue our
discussion of the principles of volume analysis (this has been the topic
of our last several "Inside The Black Box" articles). However,
over the past few days we've received a large number of email inquiries
from subscribers wanting clarification regarding what a "buy on
stop order with a limit" is, why I use them, and how they can
implement this type of order in their online brokerage account. As such,
I am going to cover this concept in today's issue and will return to my
series on volume analysis next week.
For starters, let's take the case of a trading idea I presented you with
on Tuesday, September 16th -- Earthlink (ELNK). When I first introduced
you to the stock, ELNK had closed at $8.99. As a trading strategy, I set
a "buy on stop limit order" just a touch above the stock's
closing price. I set the buy on stop order at $9.05 and the limit at
$9.25. In summary, what this meant was that we would only purchase the
shares if they continued higher, trading to $9.05 or above (the
"buy on stop" portion of the trade), but if the stock gapped
open higher than $9.25, then we would not purchase the shares (the
"limit" portion of the trade).
In this case, I used a buy on stop order to ensure that we only entered
the trade if ELNK continued its uptrend the following day. The stock had
just broken out of a multi-month ascending triangle pattern on 2X its
normal daily volume; it was not over-extended from this base. Given this
technical configuration, ELNK was unlikely to immediately reverse course
and decline on its own merits. However, if an unexpected event
had hit the market overnight -- such as a poor economic report or a
negative geopolitical event -- then the entire market could have sold
off and taken ELNK with it. In this case, the shares would have probably
traded lower the following day, so our buy on stop order would most
likely not have been triggered. By using this type of order, we were
able to ensure that we would only purchase ELNK if its previous uptrend
continued.
If you don't want to watch the stock in intraday trading, then you can
always enter this type of trade with your broker ahead of time. In
contrast to a market order, which is executed at the prevailing market
price when it hits the trading floor, a buy on stop order is executed
only when a stock hits a specific price. In order words, if the stock
does not reach that level, then the trade is never entered. (More on how
to implement this type of trade below.)
A limit order sets the highest price at which I am willing to enter the
trade. I typically use this type of order to make sure that I do not
enter into a long position at an overly high price. If ELNK had rallied
strongly in pre-market trading on Wednesday morning, for example, and
opened at $9.75, then a large gap would have been created between
Tuesday's close and Wednesday's opening. In that case, a large portion
of the trade's profit potential would have been eroded and the risk of a
losing trade increased. Since the breakout pattern on ELNK looked
promising, I set a pretty "wide" limit to buy the stock up to
$9.25. In this case, the limit was unnecessary and we entered the trade
at $9.05.
The online discount broker I trade with is called Interactive Brokers.
It is impossible for me to be familiar with the trading platform for
every reader, but I'll explain to you how I place a buy on stop order
with Interactive. My suspicion is most trading platforms will be similar
and the process close to the same. I would be extremely surprised if
your broker did not allow you to place a stop order, so the real
question is whether you can attach a limit price to this stop.
For starters, Interactive Brokers has a simple order entry line. In that
line, I first enter the symbol and the number of shares I wish to buy.
The next column over allows me to choose the order type. Here the pull
down menu allows me to create a "STP LMT" order, which stands
for Stop Limit.
At this point I'm taken to two price screens. One is called the
"Aux Price," which stands for Auxiliary Price. This is the
price at which I want to set my stop order. In the case of ELNK, the
price I would enter here is $9.05. The other column is the "Lmt
Price," or Limit Price. Since I wish to pay no more than $9.25, I
would enter that price in this column.
The final step is to specify that this order is meant to initiate a
transaction from the long side. To achieve that, I then hit the
"Buy" button. On Interactive Brokers, a separate line appears
below the line on which the stock streams. It specifies that I have
placed an order to buy ELNK as soon as the stock trades at $9.05. I
will, however, pay no more than $9.25.
A buy on stop order with a limit has now been placed.
If for some reason you wish to short ELNK, then you would follow the
same procedure above, except you would hit the "Sell" button.
Let's say you wanted to short ELNK if it broke support at $8.40, but did
not want to enter the trade at a price lower than $8.25. You would then
go through the same procedure as noted above, but in reverse. In the
auxiliary price field you would enter $8.40 and in the limit field
$8.25. You would then hit the "Sell" button to place a sell
on stop with a limit order.
If your broker does not allow you to place this kind of order, then you
can still execute this type of trade as long as you are at the trading
screen and actively following the stock. However, before you assume you
can't set a buy or sell on stop with a limit order, it's probably worth
emailing your broker to verify that fact. In addition, most online
brokers offer help desks and convenient 1-800 numbers to field common
questions such as these.
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