Lock-in Your Profits by Reducing or Eliminating Losses with a Simple Trading Tool
Did you know that there is a simple trading tool at your disposal which can help you reduce or even eliminate your losses? In case you haven’t heard, limit orders can be used to help you achieve exactly that. Given your hard work to earn the money that you now have on the line, it only makes sense for you to lock-in and protect your profits. Keep in mind though that limit orders are only valid for so long. Here’s how they work.
Buy vs. Sell Limit Orders
There are two types of limit orders, which can occur at each end of the trade. We will discuss the two as follows:
are used in cases where you wish to set a certain price threshold at which shares should be purchased. Typically, traders will use these limit orders when they want a particular number of shares bought when the stock price drops to a certain level. There may also be cases where your broker is instructed to buy more shares when the price increases to a certain level. Buy limit orders
are used in instances where you wish for a specified number of shares to be sold when the stock price approaches a particular level. You can use these types of limit orders to indicate to your broker that a stock should be sold when the price increases to a certain amount, or decreases to a certain amount. Sell limit orders
What can you accomplish with sell limit orders?
Lock-in profits. This can be achieved by setting both upper and lower sell limit orders. In the case of an upper sell limit, this is when you wish for shares to be sold when reaching a certain price level. By doing so, you are locking in your profits once this price level is reached. In other cases, you may set a minimum price level to sell your shares. In these cases, you want to lock-in at least some level of your profits before prices drop below the price of profitability.
Reduce or eliminate losses. This can be done in a similar manner as when you want to lock-in profits. You can reduce losses by setting a sell limit order at a particular price level so that you can sell your shares before the price drops even further. As for eliminating losses, this would happen in a scenario where you are currently experiencing positive returns on a stock. At this point, you would want to set the limit order at a price either equal to or above the original price you paid. You may also want to take into consideration the cost of the trade itself in order to determine where your true zero profit level really is. This will help to eliminate any potential losses on a particular stock. Ideally though, you will want to set this level at a point where you will realize some profits so you can essentially guarantee yourself a minimum achieved return.
What are the different types of sell limit orders?
We will briefly discuss the two types of sell limit orders that you can use to achieve the previous two objectives of locking in profits and reducing losses.
This type of sell limit order is used in cases where you are looking to lock-in your profits. You could issue one of these to set a certain price threshold that indicates when shares should be sold for a profit. Take profit order.
The second type of sell limit order is used in cases where you want to prevent any losses, or at least minimize them. Once you’ve set a minimum price threshold indicating when stocks should be sold, you will be able to ensure that you will not lose any more on your investment beyond that level. In this case, you are either reducing or eliminating your losses entirely. Stop loss order.
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