Online Stock Trading & Investing: Introduction to Conditional Order Trading Strategies

Trading winner

Experienced traders understand that money and risk management, coupled with strict disciplined use of stop losses are the main keys to survival and long term profitability in the market – in fact I believe these are more important than which stocks you buy.

The main advantage in going one step further and using ‘Conditional Order Trading Strategies is that you can carry on your day to day activity, ‘safe’ in the knowledge that if any stock or stocks fall to your predetermined levels, then your stop loss broker will act as a third party on your behalf -and close the trade if your predetermined stop loss level has been triggered.

Some of the popular resource stocks have fallen savagely in recent weeks. Many experienced traders would have exited before the loss in open profits or capital became too great

Others may have frozen as per my article at on “Difficulty in taking Stop Losses”. If so, they have subscribed to the BHP approach – they have Bought and are now frantically Hoping and Praying. When individual stocks or whole markets turn, they often turn quickly, such that months of gradual growth can be wiped off the board in days – and sometimes hours.

In my articles I teach Jim Berg’s and others’ strategies which all incorporate the use of initial stop losses to protect capital and then trailing stop losses to protect open profits. We have discussed the use of various types of stop losses:Weekly stops for long term investors – for which two consective closes at the end of the week signifies a “sell” on the Monday of the following week.Daily stops for short term trading – using Jim Berg’s strategies these are actioned as follows:Initial stop – set under the most recent significant low before entry (and not more than 10% below current price, otherwise choose another stock) – sell next day if closes one day below. This initial stop is also used for long term investors after the stock has first been bought.Trailing stop – after stock price have moved up sufficiently – sell next day if closes two days belowIntraday conditional stops – usually used by live day traders but can also be used by short term traders and long term investors, as defined and discussed below.

We have shown that in a rising bullish market there have been occasions whereby the use of intraday conditional stops have resulted in premature closing of the trade – as some of these stocks have rebounded during the day and continued their rise.

A trader using conditional stops at that time would have had two ways to look at this:

i)The -ve viewpoint- disappointment of being ejected from the trade too early

ii)The +ve viewpoint – pleased that his insurance policy was working and protecting him in case of a sudden downturn.

For those who used intraday conditional stops in recent weeks, their insurance really kicked in as they would have got home from work (or the golf course etc.) and found that many of their conditional orders to sell if prices hit a certain value would have been triggered. Their trades would have been closed by their conditional stop loss facility, e.g. as provided by DFS Equities, a licensed broker in Sydney.

The main advantage in using such a service is that you can carry on your day to day activity, ‘safe’ in the knowledge that if any stock or stocks fall to your predetermined levels, then they will act as a third party on your behalf – and close the trade.

For those who waited for closes below stop loss levels in recent weeks, they may have experienced a different level of emotion than their counterparts who use conditional stop loss orders and who had closed their trades much sooner.

The real test then came for those who found their stocks trading well below their stops. For the conditional stop loss user, they did not have to go through this test as their trades had already been closed days earlier. There are advantages in both approaches. The main lesson here is that we each need to work out, as part of our own personal trading plan, whether we use:Weekly charts and weekly stops orDaily charts with closes 1 or 2 days below the stops orWeekly or daily charts with intraday conditional stops

Traders and investors who know they have a ‘freezing problem’ may make the decision to use intraday stops regardless. They know from personal experience that they would rather have someone else act on their behalf at predetermined levels than go through the anguish of not being able to pull the trigger themselves when they are put to the real test.

For those who choose conditional stops, then be aware that there is one significant risk other than the possibility of early closing of the trade.

If there are very few buyers queued in the ‘bid stack’, then there is a real possibility that there could be an unnecessary and artificial cascading of prices, caused by electronic broker’s computers dumping stock in a domino effect in hundredths of a second and prices subsequently rebounding, often only minutes later as bargain hunters chase up prices.

I wrote about Exit Strategies and this subject at length in my original work for Daryl Guppy’s newsletter before Jim Berg and I started our own. These are now re-republished in my ‘Atkinson-Guppy Articles’ ebook in which I called this phenomenon “avalanche selling”.

I showed that a major advantage we had found in using DFS Equities was that they provide a ‘hybrid’ service – such that they have humans to actually place the sell order once the audible automated conditional stop trigger alarm goes off.

Their experienced staff can then monitor the screen and see if automated avalanche selling is occurring or not – then decide whether or not to place a sell order on your behalf, depending on your instructions.

Max Lewis, an old friend of mine who founded Metashare International,really pioneered the use of conditional stop loss orders in Australia in late 2000. For those wanting to know more about this subject, I believe his unique ebook ‘Conditional Order Trading Strategies (COTS) is a “must read”.