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.