Question:
Can you please demonstrate how conditional orders work, and tell us why traders use them?
Response:
Conditional Orders enable investors to set specific conditions to either buy or sell shares at a certain price if a share reaches that price in the market.
We will look at four strategies: Falling Sell, Rising Buy, Falling Buy & Rising Sell.
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This suite of conditional order strategies can be used to pre-define entry and exit points for a given security.
Falling Sell (Stop Loss)
A Falling Sell helps lock in gains or limit losses in a falling market. A Falling Sell order enables you to sell some or all of your holdings in a company if the security price falls to the level you have set as your trigger.
For example, let’s say you buy 1,000 units of XYZ Ltd at $10 per unit. You want to limit the losses of your investment, so you set a Falling Sell Trigger at $9.50, with a Falling Sell Limit Order to sell your units at no less than $9.43. This means that if the market price for XYZ Ltd reaches $9.50, your limit order will be placed on the market* to sell XYZ Ltd at no less than $9.43 per unit. Your stock will be sold if there are sufficient buyers in the market willing to pay a price of $9.43 or higher.
Rising Sell
A Rising Sell helps with taking a profit when a security price rises. A Rising Sell order enables you to sell some or all of your holdings in a company when the security price rises to the level you have set as your trigger.
For example, let’s say you have been watching the price of XYZ Ltd, which has been trading at $4.00 per unit and appears to be rising. You could create a Rising Sell Trigger with a trigger price of $4.40 and a limit price of $4.33. This means that if the market price of XYZ Ltd reaches $4.40, your limit order will be placed on the market to sell XYZ Ltd at no less than $4.33. Your stock will be sold if there are sufficient buyers in the market willing to pay a price of $4.33 or higher.
Rising Buy
A Rising Buy helps you take advantage of a security that’s on the rise. A Rising Buy order enables you to buy a security when the unit price rises to the level you have set as a trigger, or above. You also set a limit price above the trigger price (setting the maximum price you are willing to pay for the security).
For example, imagine you are researching the security price of XYZ Ltd, which is currently trading at $9.10 per unit. Your charting analysis shows that if the price rises to $9.15, the likelihood is high that momentum may keep the price rising. You could set a Rising Buy Trigger at $9.15 along with a Rising Buy Limit Order at $9.19. If XYZ Ltd reaches a price of $9.15 or higher in the market, your limit order will be placed on the market to buy XYZ Ltd at no more than $9.19 per unit. Your order will be fulfilled if there are sufficient sellers in the market willing to receive a price of $9.19 or lower.
Falling Buy
A Falling Buy helps you invest in a company when it becomes good value. A Falling Buy order enables you to buy a security when the unit price falls to the price you have set as a trigger or below. You also set a limit price, above the trigger price (setting the maximum price you are willing to pay for the security)
For example, suppose you have been watching the price of XYZ Ltd, which has been trading at $3.10 and appears to be declining. You could create a Falling Buy Trigger with a trigger price of $2.80 and a limit price of $2.85. If XYZ Ltd trades at $2.80 or lower, your limit order will be placed on the market to buy XYZ Ltd at no more than $2.85 per unit. Your order will be fulfilled if there are sufficient sellers in the market willing to receive a price of $2.85 or lower.
Important Information
The views expressed in this article are those of Stephen Karpin, a representative of Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814. Commonwealth Securities Limited (CommSec) ABN 60 067 254 399 AFSL 238814 is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 and a Participant of the ASX Group. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this information, consider its appropriateness to your circumstances and if necessary, seek appropriate professional financial and taxation advice.
