Using Limit Orders to Increase Returns
This article is going to teach you how to use our latest
research into PowerRatings (for Traders)
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:
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 Technology Stocks
The table below shows the top 10 stocks from today’s PowerRatings
(for Traders)
Top
Technology Stocks 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
Synchronoss Technologies
(
SNCR |
Quote |
Chart |
News |
PowerRating)
SNCR closed at $25.88 on 06/07/07. A limit order could be
placed to enter a position 5% below the closing price (25.88 * 0.05 = 1.29). That
means you would place a buy limit order at $24.59 (25.88 – 1.29 = 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
American Superconductor
(
AMSC |
Quote |
Chart |
News |
PowerRating)
AMSC closed at $16.19 on 06/07/07. In this example, a limit
order could be placed to enter a position 7% below the closing price (16.19 *
0.07 = 1.13). Therefore, you would place a buy limit order at $15.16 (16.19 –
1.13). As per the example above, your exit is a close above the 5-day SMA.
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.
Traders interested in learning more advanced strategies like
this should consider trading
PowerRatings Portfolios.
Ashton Dorkins is Editor-in-Chief of TradingMarkets.
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.