Candlestick Trading Blog
|Limit orders are placed to avoid buying stock at a price higher than you want to. Limit orders are also placed to avoid selling stock at a price lower than you want to. Buy limit orders can only be executed at the limit price or lower, and sell limit orders can only be executed at the limit price or higher. The investment risk attached to such orders is that in a fast moving stock market the stock price may move above the limit order before the buy order can be executed. Then traders miss out on buying a stock but do not buy at an exceptionally high price. When a stock goes down very quickly missing the limit order may mean having to sell stock at too low a price but, usually, it means selling stock shares in time. Serious investors and traders as well as the SEC recommend never buying or selling at market price but only using limit orders.
There are a number of different types of limit orders. We describe the standard type above. In addition, there are other orders that place limits on buying and selling. Stop orders and a stop limit order. Both short term trading and long term investing make use of stop orders. A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price. This is the stop price. When the stock reaches the price the stop order becomes a market order. There are buy stop orders and sell stop orders.
You will enter a buy stop order at a price above the current market price. A buy stop order is commonly entered during a short sale and is always above the current market price. The point is to limit loss or lock in gain when short selling. A sell stop order is used to limit loss for a falling stock price. You will always set the sell stop order below the current market price. In each case you will not want to set the price to close to the market price or a minor fluctuation will cause the order to be executed. On the other hand setting the price too far away will only lead to more loss. As with all trading keeping track of market movement with Candlestick stock charts will reduce the risk of being caught off guard.
Although technical analysis with tools such as Candlestick chart patterns will help you predict market movement, there is always stock market risk. Thus using limit orders and stop orders will help reduce the risk of investment if a stock moves out of an expected trading range or suffers an unexpected market reversal.
A stop-limit order combines the features of a stop order and a limit order. When the stop price is reached, the stop-limit order becomes a limit order to buy or to sell at a specified price. This method can be more exact in that the investor can sell at exactly the price he or she wants, providing that a fast moving market does not move past the stop-limit price. With extreme market volatility this can happen. This is why, even when placing limit orders and their cousins, stop orders, the investor or trader needs to stay in touch with the market using Candlestick basics such as Candlestick charting techniques and Candlestick chart analysis. Using these technical analysis tools will let the market tell the trader and investor what the market is likely to do.
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