How to Improve Your Trading by Using Limit Orders

Today's PowerRatings daily trading strategy is going to teach you how to use our latest research into PowerRatings entries and exits. Before we get to the strategy, here a brief recap. Our research showed that you can greatly improve trading performance by adding two simple rules (read the full article here):

1. Only buy a high PowerRating stock (7 or higher) on a limit order below yesterday’s close.

2. Instead of using a static exit and waiting for five days, use a dynamic price exit by exiting the trade when the stock closes above its 5-day simple moving average (SMA).

The full article provides detailed performance statistics based upon using three different entries -- 3%, 5% and 7%. As one would expect, the statistics improve each step of the way. Therefore, buying a stock on a limit order 5% below yesterday's closing price provides an even greater edge than buying a stock 3% below yesterday's close. The downside to this fact is that there are naturally fewer trades generated at these lower levels.

Top 10 PowerRatings Low-Priced Stocks

The table below shows today's featured PowerRatings list. Every weekday we feature a premium list and show you how to build a trading strategy around it. The lists are updated for subscribers after the market closes, allowing you to calculate potential entry prices before the start of the next trading day.

Here are two examples, showing two different potential limit orders, selected from the above list (yesterday's closing prices are highlighted):

5% Limit, 5-day SMA Exit

Cypress Bioscience (CYPB | Quote | Chart | News | PowerRating)

CYPB closed at $8.31 on 05/09/07. A limit order could be placed to enter a position 5% below the closing price (8.31 * 0.05 = 0.42). That means you would place a buy limit order at $7.89 (8.31 - 0.42 = 7.89). The exit price isn't known in advance; you simply exit when price closes above the 5-day simple moving average (blue line on the chart).

7% Limit, 5-day SMA Exit

Immersion (IMMR | Quote | Chart | News | PowerRating)

IMMR closed at $9.77 on 05/09/07. In this example, a limit order could be placed to enter a position 7% below the closing price (9.77 * 0.07 = 0.68). Therefore, you would place a buy limit order at $9.09 (9.77 - 0.68 = 9.09). As per the example above, your exit is a close above the 5-day simple moving average.

A similar process could be used for each of the stocks on the list. Depending on your trading style, you would have to decide upon which limit order entry to use (3%, 5%, or 7%). It is also possible to use multiple limit orders placed at different percentages below the close. It's important to point out that your order is only good for that particular trading day. Remember to cancel any orders that don't get filled and you would have to repeat the whole process the following day. Nonetheless, when you see how much you can potentially improve your trading results, it becomes clear that the extra work is worth the effort.

Ashton Dorkins is Editor-in-Chief of TradingMarkets.com.

Reminder: We are in no way recommending the purchase or short sale of these stocks. This article is intended for education purposes only. Trading should be based on your own understanding of market conditions, price patterns and risk; our information is designed to contribute to your understanding.