Always Trade with Limit Orders and Stop Loss Orders

Dividend Earner

Dividend Earner

Updated on

6 min read Affiliate Disclosure

There is so much information on what to buy or when to buy, but not much on when to sell. Investors frequently ask this question because they fear losing profits or future profits if they sell too early.

More specifically, there is even less information on how to place a trade. With computers at play, don’t bet against AI when trading, it can be a costly move. You should watch the Hummingbird Project movie (2018) to understand.

Avoid Market Orders

The key is to not use market orders. A market order is not your friend when placing a trade. Sure the transaction happens then and there but you need to be aware that between your ticker update (often delayed by 15 minutes) and your trade activation, there are machines trading behind the scenes. Those machines can move the price faster than you can see it – it’s called high-frequency trading or flash trading. Either of them is attempting to profit from small movements.

Buy with a Limit Order

To avoid getting caught with a higher price, put a limit order at or around the quote. You just need to specify the limit order which is a request to buy at or below the specific price. Hopefully, you can see real-time quotes. See what your broker offers. The TMX shows real-time quotes for Canadian holdings but not for US stocks. There could be other options where real-time quotes are provided.

Once you place the quote, be patient. If you want the trade to execute, place it a couple of cents above the ask. If the ask is lower, you may get the lower price.

RBC Limit Order Example

Sell with a Limit Order

I always put a limit order when I sell. Even if I just want the market price, I put the limit based on the bid. If it’s trading heavily and moving, I might go a few cents lower. Selling with a limit order means that you are requesting the broker to accept the limit price as a minimum. The transaction will trigger as soon as it can fill the order at or above the limit. You are simply protecting the bottom you are willing to sell at.

Questrade Limit Order Example

Protect your Profits

We covered limit orders to protect yourself from unpredictable price movement. Now it’s time to learn how to protect your profits.

There are times when the price has reached peaks that appear to be abnormal. You might not want to sell but you also don’t want to lose that profit. Stop Loss Orders are just what you need and remember that you don’t have to sell everything and you can always get back in.

Protect with a Stop Loss Order

A Stop Loss Order (Stop Order) is when you place a sell order with a stop condition. The naming is a little confusing as the stop identifies the order trigger price. Be aware that you may get that price or not. The reason for that is that the order triggers at the stop price as a market order. If the stock is in a downfall, you may catch a falling knife.

For example, assume you bought Canadian National Railway at $76 and it’s worth $119 now. You want to protect your profit in case a recession comes around or the earnings are bad. You place a Stop Loss Order at $110 to protect $34. Why $110? You want to give room to the stock to do its regular daily swings. If you place your Stop Loss Order too close to $119, you will easily trigger it. Since the stock can move by $2 or $3, you want to give it some space considering you just want to protect yourself in a downside. In this situation, you protect your profit while benefiting from any potential growth.

Protect with a Stop Loss Limit Order

A Stop Loss Limit Order is the same as the above but with an added protection where you specify the bottom you are willing to sell at.

Using the example above, your Stop Loss Order is at $110 and then you place a Limit at say $100 to highlight you won’t sell below $100. If the stock price reaches or drops below $110, the order is placed with a Limit of $100. While the Stop Loss triggers a market sell order, the Stop Loss Limit order is a Sell Limit order which tells the broker to sell at market but not lower than $100.

Using a Trailing Stop Loss

This is the best option if it’s available. Do check with your discount broker if a trailing stop is available.

The beauty of the Trailing Stop Loss Order is that you can specify a dollar amount or a percentage of the price. Again, too close of a value may trigger your order due to the normal market fluctuations. There is also an option to specify a limit. It behaves exactly like the Stop Loss and Stop Loss Limit but the trigger price is relative to the stock price and the same about the limit. The initial price is set on the day to register the order, as the price fluctuates, the stop loss rises along with the stock price but it will not go down.

For example, if you set a Trailing Stop Loss with Canadian National Railway at $9, your trigger point is $110 with a stock price of $119. If the stock price goes up to $126, your new trigger price is $117 and if the stock price drops to $123 later on, your trigger price stays at $117.

Not all platforms offer the Trailing Stop. I have access to it with Questrade but not with RBC Direct Investing. This feature can give an edge to the leading online stock trading platform.

Trading Consideration

Now that you have learned how you can protect your profits, be mindful that even if your order triggers, you can still buy back. There is a tax consideration in a non-registered account but otherwise, don’t hesitate to get back in if the company is a fit for your portfolio after it has settled.

Earnings can be a time when you want to place a stop-loss order to protect yourself against bad news that you could not see coming and retain your profits. It’s not a lot of work, but there are 4 quarters in a year and each of your holdings reports at different times.