If you have always wanted to know more about this topic, then get ready because we have all the information you can handle.
Within the buy to cover orders, there are four options in which to place against your stock purchases. When you buy to cover on a stock order, you are in agreement that you will buy the stock at the latest share price; however, because there is a lag between the time you approve to buy the stock and the actual transaction, a price difference may occur. You could end up paying more than anticipated for each stock, or a considerably lesser amount per stock, which is what you are eager for. You can also buy to cover limit orders, which guarantees that you pay no more than the set limit price. However, if stock prices hold above the limit buy price, this type of buy to cover order will never be executed.
This type of transaction is mainly used by investors who want to get into a certain market. You may also want to buy, to cover stop orders in which case the stop orders become simple stock orders as soon as the value is at or above the stop price. This type of order is used to get you out of an unfavourable stock so that you will not have lost any profits. And, finally, you may want to buy to cover a limit order that converts to limit order only when the share value is at or above the stop price. You have to know each of the buy to cover orders so that you can make educated decisions about your investments.
From one decision period to the next in the stock market game, the markets can move up and down non-stop, which means that prices of shares are at a frequent changing point. You may think about purchasing a certain stock that is at $5 per share, and in the next day, the value per share has risen to $15 per share.
This is where the betting of the stock market comes into play. By erudition the advantages of the buy to cover orders, you can multiply your odds of earning money on the stock exchange rather than of losing money. The most obvious benefit to the entire buy to cover options is that they are in place to make you money, when executed properly. For example, you would not perform a stop loss on a stock that has steadily increased over a 5 month period. If you did this, you would force yourself to squander money to buy the stock in order to cover your mistake. You choose to buy 175 shares of stocks from Albertson’s, a grocery store chain, at $75 each, for an entire investment of $13,125. Over a four month period, you observe that the stocks have gained in profit, and you would like to do something to guarantee that you keep this earned profit. Not knowing better, you put a stop loss of $45 per stock without consulting with your stockbroker. From that position forward, if your stock decreases to $45 per stock, you have to sell it, and any earlier earned profit is null and void. The only chance you have in getting back that profit is if you are swift enough in the non-stop stock market game, to buy the Albertson’s stocks before somebody else does. However, even if you are able to do this, you have still suffered a great loss monetarily.
Educate yourself in the stock market game.
As with any game, there is some form of jeopardy involved, however, when you play the stock market game, you can avert a great deal of distress by simply taking the time to acquire knowledge about all types of orders you are able to place on your stocks. If you require help educating yourself about the types of orders to place on your stocks, you should consult your stockbroker in order to take professional advice before taking matters into your own hands, inevitably forcing yourself to lose some of your invested money’s profit. Thus, it is absurd to invest your hard earned money into any program before you know all the data necessary to make a well-informed, educated judgment.
If you could take the main ideas from this article and put them into a list, you would a great overview of what we have learned.
A Winning Approach to Trading in the Stock Market
Many traders lose simply out of ignorance. They base their trades on hunches, news, or tips from friends, and do not define specific risk and profit objectives before placing trades.
Others have the merit of educating themselves but fall victims of their emotions. They hold on to losing positions hoping they will turn into winners and sell winners by fear of losing a small gain. They overtrade to fulfill a need for action or by fear of missing out.
The consistent winners follow a winning approach:
- They have a strategy to enter and exit trades
- They use good money management
- They take consistent actions, they follow a trading plan
- They keep good records so they can review their actions
- They avoid overtrading
- They have a winning attitude
A strategy to enter and exit trades
You need to a strategy to put the odds in your favor for each trade you take. Your strategy should be as objective as possible and include the following elements:
- Entry: conditions required before you can enter a trade – may include technical analysis, fundamental analysis, or both.
- Initial stop loss: price at which you will close the entire position if it does not go in your favor. The risk per share is the difference between the entry price and the initial stop.
- Initial price objective: price at which you will take some or all profits if the trade goes in your favor.
- Trade management: set of rules that dictates your actions while a trade is opened. It may include trailing stops, closing position, etc…
For every action you take, the reason should be clearly described in your strategy.
Money management rules to keep losses small
The goal of money management is to ensure your survival by avoiding risks that could take you out of business. Your money management rules should include the following:
- Maximum amount at risk for each trade. The different between your entry price and your initial stop loss is your risk per share. Your maximum amount at risk for each trade determines the share size.
- Maximum amount at risk for all your opened positions.
- Maximum daily and weekly amount lost before you stop trading – avoid trying to trade your way out of a hole after a loosing streaks.
During your learning phase, your goal should be to survive, not to make money. Start with low limits and raise them as you become a consistent winner otherwise you will simply go broke faster.
Good record keeping
Although the process of gaining experience cannot be rushed, it can be made much more efficient by keeping good records of your actions. Good records will allow you to:
- Review your actions at the end of each day to make sure you followed you strategy, not your emotions.
- Learn from your losses – they cost you money, make sure you get the education in return.
You should also keep a journal of your observations.
A trading plan to keep emotions out of your decisions
During trading hours, emotions will turn smart people into idiots. Therefore you have to avoid having to make decisions during those hours. This requires a detailed trading plan that includes your strategy and your money management rules.
For every action you take during trading hours, the reason should not be greed or fear. The reason should be because it is in the plan. With a good plan, your task becomes one of patience and discipline.
You have to follow the plan without exception. Any valid reason for an exception – for example, correcting an oversight – should become part of the plan.
Sometimes the best thing to do is to do nothing. Not trading on those bad days is key to becoming a consistent winner – in some situations it is very tempting to overtrade:
- If you trade to fulfill a need for action, to relieve boredom
- If you can’t find the proper setup but can’t wait
- If you fear you are missing out on a great trade or on a great market
- If you want to make up for losses (revenge)
- If you trade to feel like you are working instead of sitting around. Trading involves a lot of work other than the actual buying and selling.
You should not trade under the following conditions
- You are not following my trading plan
- You have reached your daily or weekly maximum loss
- You are sick or very tired
- You are very emotional (upset, pressured to make money, self-esteem destroyed)
- You are using new tools you are not completely familiar with
- You need time to work on your trading plan
A winning attitude
Losing traders look for a “sure thing”, hang on hope, and avoid accepting small losses. Their trading is based on emotions. You must treat trading as a probability game in which you don’t need to know what is going to happen next in order to make money. All you need to know is that the odds are in your favor before you put a trade.
If you believe in your edge, which is you believe that the odds in your favor for each trade you enter, then you should have no expectation other than something will happen.
Your attitude will have a direct influence on your trading results:
- Take responsibility for all your actions – don’t blame the market or world events.
- Trade to trade well and for the love of trading, not to trade often and not for the money. The money will come as a result of trading well.
- Don’t be influenced by the opinions of others. Reach your own decisions and follow them.
- Never think that taking money from the market is easy and never assume that you know enough.
- Have no particular expectation when you place a trade because you know that anything can happen.
- Don’t try to guess the future – trading is a game of probabilities.
- Use your head and stay calm – don’t get excited or depressed.
- Handle trading as a serious intellectual pursuit.
- Don’t count how much money you have made or lost while you are in a trade – focus on trading well.
Here’s a great ‘ten simple steps’ stock trading strategy which you can use to maximize your trading profits whilst at the same time minimizing risk to your trading capital. If you already do your own trading and can set automatic buy/sell orders then this strategy is perfect for you.
No matter which stock trading strategy you read about or try, they all share one fundamental principal, that is to buy low and sell high. Sounds simple enough, but then why do some 95% of traders manage to get in and out of the market at the wrong time, over and over and over again?
What over-powering force is in place which steers the 95% to do this? The answer is human nature and the counter-intuitive manner in which the stock market operates.
The 5% of traders who consistently make money in the stock market do so by buying when the masses are selling, and selling when the masses are buying.
They do this by following a dozen or so strategies, some simple, some more complicated. It is not in the scope of this article to go into each and every strategy, but here’s one anyone can use.
The links at the end of this article point to the web page where you can see this strategy in the form of charts and graphs which make it much easier to understand. Take a look if you’re finding it difficult to picture it.
The Ten Steps Strategy:
1. Study the 12 month charts of several reasonably well known companies and pick out stocks that have been in a steady UPWARD trend throughout the period. There are always plenty of them, even in a falling market.
No stock is ever a sure thing, but give yourself a head start by choosing one which is going in the right direction! Fundamentals don’t mean anything if the price of your chosen stock is trending downwards. Don’t care what the company is or what it does. This is irrelevant, you are just here to make money, period.
2. Check out the trading volumes and eliminate any which lack decent liquidity.
Avoid stocks with not much liquidity (not a lot of buyers/sellers) as you need to be able to get in and out easily and without effecting the price yourself.
3. Study the 3 month chart and check the recent levels of resistance. These are points where the stock price has peaked and then pulled back, before breaking new heights again.
4. Place a mental note to buy at a price just above the most recent top. Note you are not actually buying at this point, just making a mental note to buy when it hits this price.
The stock will need to reverse upwards again and ‘break through’ that last resistance level to effectively ‘buy you in’.
If the stock price does not reverse but instead further drops away, simply lower your ‘mental buy order’ to just above the resistance levels going down and wait for the stock to turn back upwards again.
The great part is the more it drops the better as you have still not bought in.
If it is a well known company and there’s temporary bad news surrounding it (anything except impending closure) you can be sure this stock will eventually bounce back and catch up with (or even temporarily over-take) its long term trend.
When it does it will catch up quickly, over a few weeks perhaps. Follow the next steps and you will be sitting on it all the way up to next top. Gains as much as 30% are common.
5. When the stock price eventually reverses direction back up and passes up through your buy order, immediately buy at market price.
6. Now set your stop loss. Study the last couple of months of the chart and check the rising levels of support. These are points where the stock has resumed its upward direction following a pull back.
7. Place a ‘note to sell’ at a price just below a recent support level. Not too close but not more than 5-8% below your buying price. Your sell order is now your stop-loss.
I cannot stress more – you MUST use a stop loss. Your stop loss will protect your capital if the stock unexpectedly reverses down again. You can always get back in later when it recovers from a very deep pull back (and make even more money in the process).
8. As the stock price moves up, but as soon as reasonably possible, move your stop loss (sell order) up to your buying price. Your stop loss is now your break even. Don’t do this too soon as the stock price may possibly test the support level above your stop loss before heading up again. Give it a few days to do that if it’s going to.
9. As the stock price continues up, keep trailing your sell order up with it to just below the support levels going up.
10. When the stock price reverses direction and passes down through your sell order, immediately sell at market price. Your sell order is now your stop gain.
On a final note, one of the greatest obstacles to success will likely be you. One of the hardest things to do is to actually sell when your stop is triggered. There’s always the voice in the back of your head telling you to hold on a bit longer if the price moves against you. This could be the death nell of your trading because if the price continues to fall it will erode your trading capital.
To counteract this danger you should try to automate many of these processes. Set your stops and if the stop is triggered you can find out why afterward.
If you can’t understand why you keep losing on your trades then take a look at the Ten Steps To Profitable Trading, the Best Trading Strategy by Clicking Here.