Page 278 - THE MARKET WHISPERER

274 PART 9 - The Trading Platform

Additional uses for the limit order
• Buy limit

Let’s say I decide to buy a stock if it goes higher than $30. I prepare a buy
limit at $30.01 and when the price reaches that limit, I click the buy button.
The buy order is executed at the requested price if a seller is found at that
price. The meaning of a limit order is to let me limit my bid at $30.01; in
other words, I am not willing to buy at a higher price. So in this case, I am
placing a Limit order that is already at least partially executable by the
sellers displayed in the market.

The advantage: I fix my maximum price.
The disadvantage: I take a risk that there will not be enough sellers at
the price I set, and the trade will not be executed at all, or will be executed
for only part of the amount.
Possible solution: I can enter a limit for $30.03.
This is the order you would usually use, but it depends on the nature
of the stock. For stocks with low volume and high volatility, you may need
to increase your limit price, buy at a higher price than you had originally
wanted, and increase the risk. By contrast, with stocks of high volume, you
may be able to manage with a more precise limit, since the chances are
higher of receiving the stock at your bid price.

• Sell limit (SHORT)
I decide to sell a stock when its price drops below $30. I prepare a sell

order at $29.99 and when the price drops below $30, I click the Sell/Short
button. The sell order will be executed at the requested price on condition
there is a buyer for that price. The meaning of the limit is that I limit the
sale price to $29.99. In other words, I am not willing to sell for less than
that price.

The advantage: I fix the minimum price I am willing to accept.
The disadvantage: I take the risk that there will not be enough buyers at
that point and the trade will not be executed.
Possible solution: setting the limit at $29.97. This means I want to sell
when the share drops below $30, but limit the sell price to $29.97.
Every limit must be planned according to the nature of the stock. For
stocks with low volume and high volatility, it is worth increasing the limit’s
spread, but then I might be selling at lower than I had wanted. By contrast,
for stocks with larger volumes, it is usually not necessary to increase the
limit’s spread, since there is reasonable chance of selling the stock at the
requested price.