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Transcript
Hello there, and welcome to the eToro academy trading orders video.
Today we’re going to explore four essential trading concepts that are important for every trader to understand.
We’re going to talk about limit orders, market orders, trailing stops and take-profit. These tools are crucial for successful trading, and can provide immense benefits and strategic advantages.
So, let’s get stuck in.
First up, market orders.
Market order is an instruction to buy or sell an asset once its price goes beyond a predetermined level set by the trader.
For example, let’s say I want to sell my shares quickly due to a sudden market downturn. Placing a market order guarantees my trade will be executed promptly at the prevailing market price.
It’s important to note however, that market orders do come with a degree of uncertainty as price can fluctuate rapidly.
Next up, stop-losses.
Also known as stop orders, a stop-loss allows traders to set predetermined exit points on their trade to limit potential losses.
For example, let’s say you bought shares in a company at $100 per share. Using a stop-loss order, it allows you to automatically sell if the price goes beneath $90.
It is important to note that stop losses protect you as long as the market is open.
If the market is closed and a company announces bad news during the night, the company’s opening price could be below your set stop-loss which means your order would sell at a lower price than the stop-loss you set.
Alternatively trailing stops automatically adjust as the price moves in favour of the trade, locking in profits.
Here’s an example.
Suppose you buy 100 shares at $50 per share, a total investment of $5,000.
You are optimistic about the stock’s potential and want to protect your investment in case the price goes down, but you also want to allow for potential further gains if the stock
price increases.
You decide to set a trailing stop of 10% below the highest price reach since you bought the shares.
This means as the stock price moves up, the trailing stop will move up as well, always maintaining a distance of 10% below the highest price reached
Let’s see how it works in two different scenarios.
Scenario one.
Stock price rises to $60 per share. With a 10% trailing stop, your trailing stop order is placed at $54 per share, 10% below the highest price of $60.
Scenario two, stock price drop. You buy 100 shares of company X at $50 per share.
You then decide to place a 10% trailing stop below your purchase price. This would be at $45 per share. If the price never goes above $50 a share, a stop loss will stay at $45. In this example the price unfortunately moves lower but we limit our loss by getting out of the trade at a loss when the price reaches $45, regardless if price continues to decline.
Last but not least, limit orders.
Limit orders enable traders to set specific price levels at which they want to close or open a trade.
For example, let’s say I want to buy company Y stock, but believe it’s overpriced at the moment. I can set a limit order to buy the stock only if it reaches my desired price. This way I don’t have to sit glued to my screen constantly monitoring the market. The order will automatically execute when price reaches or surpasses my limit.
Limit orders give us the flexibility to only get into the trade if price goes to the level we want to buy or sell.
Just remember when considering a trade, we should carefully assess the risk-reward ratio to ensure it allies with our trading style and edge, in order to maintain consistency and make informed decisions in pursuit of our trading objectives.
Using orders can help us by providing structure and control, allowing us to implement predefined strategies, automate trade executions, and ensure we take advantage of favourable market conditions without constantly monitoring the market.
That’s all for me in this video, but I’ll see you soon.