When To Use A Limit Order
A limit order could be necessary during certain market conditions. Typically Breakout Theory’s trading program uses market orders, because the system seeks larger and longer term trends. With Breakout Theory we are not seeking to beat the spread, we are here to beat the market.
Nevertheless, presently there are exceptions to the rule, and occasionally using a limit order is a wise decision. There are some instances the following where you might like to consider using limit orders. All circumstances are unique rather than all scenarios are right here. This should simply serve as a guideline of when you need to use limit orders.
Situations You might like to Use a Limit Purchase
Volatile markets – Risk may drastically increase as cost action gets wider in a shorter time frame. Anytime there is a question as to what price your trade will become executed, you should always use a limit order. Volatility in any financial instrument that you’re trading ought to be observed, since it skews the risk prize profile of the trade severely
Risk / Reward Formulation Again is off stability -, risk /prize calculations are based of market price. If the purchase price fluctuation are so excellent that a specific risk number cannot be calculated, it is highly advised to use a limit order. In a more simple sense, you would like to know your bottom line always. Using a limit order give you an specific figure in which you shall enter a trade, thus defining total portfolio risk.
Low Volume Stock – Breakout Theory does not trade low volume stocks. Any stock whose volume is definitely much less 1 million shares traded is known as low volume daily. There are exceptions to the guideline. Limit orders are recommended when trading low volume shares highly. Having less volume causes liquidity problems and price actions gets very choppy. During breakouts in low volume stocks, the situation can become worse and as all the factors just described above are amplified.
Market Crashes – Using a limit order during market crash is mandatory. However it’s very difficult to get limit orders to execute in this kind of market environment. Probably your limit purchase shall stand open up for a significant period of time. During market crashes, liquidity dries and there are zero buyers of fill up. There is a large imbalance, and the effectiveness of the market breaks down.
Wide Bid / Ask Spread – Having a wide spread again skews risk, as entry price greatly differs from exit price. Using a limit purchase shall help you to get a competitive cost and calculate risk better. Quite often when trading breakouts you can find halted out in a brief period of period. It is vital that you realize what cost you are “probably” to
INEXPENSIVE Stock – Stocks under $20 routinely have all the problems in the above list. There is small participation in small cap shares. When trading more affordable stocks it’s a good idea to use a limit order. The lower priced stocks volatility is very high a Rs 10 move in a Rs 100 stock is definitely a 10% swing. That swing also translates into total portfolio value change.