Frequently Asked Questions
What is the best trading platform for beginners?
The best trading platform for beginners is Etrade Pro.
What is the best trading site for beginners?
What is the best trading software for beginners?
The best trading software for beginners, in my opinion, is Finviz. To check it out click here to go to Finviz. You can use most of its powerful stock screener features for free.
What is candlestick charting?
Candlestick charting is the use of Japanese candlesticks, developed hundreds of years ago, to study price action.
TradingAcademyMumbai posted an excellent video on candlestick charting called Understanding Candlestick Charts.
How much money do I need to start investing?
To start investing you need a minimum of $1,000 but $2,000 is better. The reason you need $1,000 is that brokerage fees eat up too much of your account. It makes your cost basis on a stock you buy much higher than the actual market price. With $1,000 you have to take a position in 1 or 2 stocks which is very dangerous. Preferably you should take at least 5 positions at the same time, with each position being nothing less than $2,000. This puts a starting capital closer to $10,000.
One of the biggest mistakes you can make is not starting out trading with enough money.
SimpleTradingIdeas posted the excellent video below called 6 Common Mistakes Made By Beginning Traders.
What is a good online broker to use in the UK?
A good online broker to use in the UK is Interactive Brokers.
If you live in the UK then you have probably discovered that Etrade Pro is not available.
Howardv posted the excellent video below called Broker and Platform comparison: Interactive Brokers and Tradestation. This video is 4 years old and so Interactive Brokers may have updated their online software platform since.
What are institutional buyers?
Institutional buyers are corporations that fall within the “accredited investor” category, and that invests at least $100 million in securities; for a broker-dealer the threshold is $10 million.
Institutional investors are banks, insurance companies, retirement or pension funds, hedge funds, investment advisors and mutual funds.
Amateur traders who trade at home for a living don’t move markets or put stocks into sustained uptrends. Institutional traders are the only ones with the purchasing power to do that.
Swing traders and day traders can move quicker than institutional investors and thus “feed” off of their buying and selling.
What does swing trading mean?
Swing trading is any stock play where the hold time is between 1 and 5 days and the goal is to profit from a “swing” move up or down.
The most common pattern that swing traders trade is the oversold pattern.
Many swing traders go for a 5% to 10% move and then they exit the market quickly.
TradeWins1 published the excellent video below by Oliver Velez, the CEO of Velez Capital Management, called Oliver Velez: Swing Trading.
What are the best technical indicators for swing trading?
The best technical indicators for swing trading are the RSI and MACD.
The RSI (relative strength index) is used to help swing traders time either oversold or overbought entries. An RSI above 70 signals a stock is overbought and an RSI below 30 signals a stock that is oversold.
PSAadmin posted the great educational video below called Trading with the (RSI) Relative Strength Index.
The MACD (moving average convergence/divergence) is used by swing traders to identify trend changes and the strength of momentum.
MFGlobal posted the excellent video below called Swing Trading Using the MACD.
What is the best stock picking software?
The best stock picking software is Finviz and Chartmill. These powerful technical and fundamental screeners are awesome. Some of the best traders on Wall Street recommend Chartmill and Finviz. I did a lesson on Finviz here. I did a lesson on Chartmill here.
What is the best stock picking strategy?
The best stock picking strategy is swing trading. The idea is to buy small cap stocks with a market cap between $300 million and $2 billion, with a beta of 1 or greater, a price of under $10, a debt/equity ratio of less than 0.1, trades over 500K shares per day, has a high short interest days to cover metric, and that is oversold and just formed a candle over candle reversal.
What’s day trading?
Day trading is the rapid buying and selling of stocks. A day trader may hold a position for a few minutes to a few hours but by the end of trading that day, all positions are closed out.
TradingExchangecom posted the excellent video below called Day Trading vs Swing Trading.
What is the best day trading app?
The best day trading app is Etrade Mobile. The Etrade Mobile app gets live streaming quotes and even level 2 quotes right to your smartphone or tablet.
You can even trade in the After Hours market.
If you want to deposit money, just take a picture of your check to electronically deposit a check directly to your Etrade account.
You can learn more about the Etrade Mobile app by going here.
Can I count on your stock trading alerts and stock market wisdom to teach me?
Yes but the first thing you need to do is to subscribe to my blog to get the once a day email lessons. It’s free. By the end of 50 days, you will know enough about stock trading and stock screening to start building your own trading account. Subscribers will get this lesson and others like it emailed at the rate of 1 lesson per day for the next 50 days. Fill out the form below and subscribe now!
What does an oversold stock market mean?
An oversold stock market means one or more of the major indices (Dow, Nasdaq, S&P 500, Russell 2000, etc.) have sold off so as to make the RSI at or below 30.
StockMarketFunding Trading School published the excellent video below on oversold markets.
What does an oversold stock mean?
An oversold stock is a stock that has dropped so that the RSI is at or below 30. The lower the RSI, the more oversold the stock is.
Trading an oversold stock is about establishing the support area. Having an oversold stock hit a support level where there is a history of the stock bouncing off that level, and then waiting for a candle over candle bounce is how to trade an oversold stock pattern.
What is relative strength index in technical analysis?
The relative strength index or RSI is used by traders to determine when a stock is overbought or oversold.
The RSI compares the magnitude of recent swing move ups to recent swing move downs in an attempt to determine if a stock is overbought or oversold. It is calculated using the following formula:
RSI = 100 – 100/(1 + RS*)
*Where RS = Average of x days’ up closes / Average of x days’ down closes.
The RSI indicator is a type of oscillator indicator which means it works best in a trading market and not a trending market. In a trending market, the RSI can become useless as it gyrates for long periods of time at an either overbought or oversold level.
PSAadmin published the excellent video below called Trading with the (RSI) Relative Strength Index.
What are short sellers?
Short sellers are traders who are short a stock. Shorting a stock means to bet that the stock will go lower. A short seller borrows shares from his broker and sells them with the contractual obligation to buy the shares back (buy to cover) at a later date. The idea is to buy the shares back for less than you sold them short so you can pocket the difference. Short selling involves borrowing thus you need to have a margin account in order to short stocks.
The initial short sale that opens a trade pushes the stock price down. The buy to cover order to exit the trade pushes the stock price up.
Short sellers often push a stock down to an oversold level where the RSI falls below 30.
Wall Street Survivor published the excellent video below called Understanding Short Selling.
What are the best RSI settings?
The best RSI setting used by most traders is the default setting of 14. This means that the indicator will go back 14 periods based on the chart being used (14 days on a daily chart, 14 hours on an hourly chart and so forth) and make its calculation based on that.
Again, since most traders use the default setting for the RSI which is 14, that setting will usually produce the most reliable overbought and oversold signals.
The RSI gives a buy signal when it has been below 30 and then closes above 30. The sell signal is provided from the RSI when it has been above 70 and then closes below 70.
The higher the RSI, the fewer, but more reliable, signals you will get:
I did not follow a break above 70 and then a break back below 70 as the signal in these charts. The two charts above are just so that you can see how you have fewer, but more accurate, overbought or oversold levels the more you increase the RSI.
Some professional swing traders swear that the best RSI settings use a 2 day period using 90 as the overbought level, and 10 as the oversold level. Divergences are then used to predict market turns.
Notice the divergences between the RSI and price. These divergences take place because momentum often drops right before a market turn.
There’s no reason you can’t use a 14 period RSI to determine if the market is overbought or oversold in the larger trend, then use the 2 period RSI divergence method to better time your exact entry or exit.
What is an options trading account?
An options trading account is an account that allows you to trade options. Many online brokerage firms require additional Options Account Agreement forms to be filled out where you sign that you understand the risks associated with options trading.
What are option trading hours?
Options only trade during regular market hours. You cannot place orders for options for the pre-market or after-hours trading.
Options on stocks trade from 9:30 a.m. to 4 p.m. ET.
The close of trading for options on ETFs coincides with the closing of the underlying security.
Last Trading Day: Trading in options on ETFs will ordinarily cease at the close on the business day (usually a Friday) preceding the option expiration date.
What is triple witching?
Triple witching or Triple Witching Hour or Freaky Friday, is the last hour of the stock market trading session (3:00-4:00 P.M., New York Time) on the third Friday of every March, June, September, and December. On these days three kinds of securities expire: stock market index futures, stock market index options, and stock options.
The simultaneous expiration of these three kinds of securities often increases the trading volume of options, futures and the underlying stocks.
On those same days in March, June, September, and December, Single-stock futures also expire, so that the final hour on those days is sometimes referred to as the Quadruple Witching Hour.
What are option trading strategies?
The most popular options trading strategies are: naked calls/puts, covered calls, married puts, bull call spreads, bear put spreads, protective collar, long straddle, long strangle, butterfly spread, iron condor, and an iron butterfly.
Naked calls are just buying the call option without owning the underlying stock.
Covered calls or a buy-write strategy is when an options trader buys a stock and then writes (sells) a call option against that stock. Option traders use covered calls when they have a short-term position in a stock and fear it will go sideways or down. Selling a covered call against their stock generates income by way of the call premium that can lower the cost basis of the stock held.
Investopedia posted the excellent educational video below called Call Option Basics.
A married put is when an options trader buys a stock, then simultaneously purchases a put option for an equal number of shares. Option traders who use this strategy are bullish on the stock they hold but want to protect themselves against possible short-term losses.
Charles Hughes posted the awesome video below called Maximum Risk 5.9% with Unlimited Upside.
Bull Call Spreads
A bull call spread is when an options trader buys call options at a certain strike price and then sells the same number of calls at a higher strike price. Both call options will have the same expiration and will be for the same underlying stock. Options traders use this strategy when they are bullish and expect a small rise in the price of the underlying stock.
Daniels Trading posted the excellent video below called Bull Call Spreads – A Cheaper Way to Be Long Options.
Bear Put Spreads
A bear put spread is when an options trader buys put options at a certain strike price and then sells the same number of puts at a lower strike price. Both put options will have the same expiration and will be for the same underlying stock. Options traders use this strategy when they are bearish and expect the underlying stock price to drop.
Option Alpha posted the fantastic video below called Bear Put Spread Option Strategy.
A protective collar is when an options trader buys an out-of-the-money put option and writes an out-of-the-money call option at the same time, for the same underlying stock. Option traders use this strategy after a long position in a stock has had large gains. This allows options traders to lock in profit without selling their shares.
FNArenaEducation posted the video below called Options and Equity Strategy Collars – Covered calls and protective puts.
A long straddle is when an options trader buys both a put and a call option with the same strike price, on the same stock, with the same expiration date. Options traders use this strategy when they are convinced that a stock will have a big move, but are unsure which direction the move will be in. This allows options traders to maintain the possibility of unlimited gains, while the loss is limited to the cost of both options contracts.
Option Alpha posted the video below called Long Straddle Option Strategy.
A long strangle is when an options trader buys a put and call option with the same expiration, on the same stock, but with different strike prices. The put strike price will usually be below the strike price of the call option, and both options will be out-of-the-money. Options traders use this strategy when they think a stock will have a big move, but are unsure which direction the move will be in. Losses are limited to the costs of both options.
Option Alpha posted another awesome video below called Long Strangle Option Strategy.
A butterfly spread is when an options trader combines both a bull spread with a bear spread, and uses three different strike prices.
Investopedia posted the excellent video below called Investopedia Video: Butterfly Spread.
An iron condor is when an options trader enters a long and short position in two different strangle strategies. In the article above I talk more about the iron condor.
ZacksInvestmentNews posted the excellent educational video below called How to Profit with an Iron Condor Option Strategy.
An iron butterfly is when an options trader combines either a long or short straddle with the purchase (or sale) of a strangle at the same time. Options traders use the iron butterfly to limit losses within a specific price range, depending on the strike prices of the options purchased.
ZacksInvestmentNews posted another excellent educational video on the Iron Butterfly below.
Tradestation posted the fantastic video below from a lecture John Carter did called My Five Favorite Options Trading Strategies – John Carter.
What stock trading account is best?
Etrade Pro is the best stock trading account on the market. Also, the best type of account for stock trading is called a “margin account”. A margin account will let you get around the restriction of “3 business days to settle the trade” that cash only accounts have. A margin account is needed to “short stocks” as well. Make sure you sign up with ETrade Pro, and open a margin account.
What happens when you trade stocks?
When you trade stocks, your orders go to a stock exchange. The stock exchange is a place where buyers and sellers agree on price, and then a trade happens.
MoneyWeekVideos posted the educational video below called What is a Stock Exchange?
What are trending stocks?
Trending stocks are stocks that form a series of higher lows and higher highs, or lower lows and lower highs. Big buyers cause a stock to trend.
Stocks don’t move unless there are big buyers present. One way to know that people will be buying a stock is to measure the “footprint” it has on the Internet. This is why Google Finance Trends and the “Popular” screen work. Why is everybody talking about the company? Answer that and you’ll know the “story” behind the stock.
What liquidity ratio is best?
The current ratio is the most popular liquidity ratio. The current ratio is calculated by dividing current assets by current liabilities. The idea is to determine whether a company’s assets (cash, cash equivalents, securities, receivables, and inventory) can pay off its liabilities (notes payable, debt, payables, accrued expenses, taxes, etc.). A higher current ratio means the company has enough assets to pay off its debt.
The quick ratio (also called the acid-test) measures the most liquid current assets there are to cover current liabilities. The quick ratio excludes assets that are more difficult to convert into cash like inventory. A higher quick ratio means a more liquid current position.
Do not confuse liquidity from an accounting perspective, with liquidity from a traders perspective. Gordon Hensley posted the excellent video below on financial ratios.
What are chart patterns?
Chart patterns are a map of human behavior that repeats itself because history repeats itself. Neither history nor human behavior are random.
Traders use chart patterns to help predict future market behavior.
There are three types of trading patterns: oversold, continuation, and breakout patterns.
Lance Beggs with YourTradingCoach posted the excellent video below on chart patterns called YTC Intro to Technical Analysis (Module 4F) – Chart Analysis – Charting.
What is a candle chart pattern?
Candlestick charting is one of the oldest forms of technical analysis that dates back to the 15th century.
Candlestick charting compliments existing chart patterns such as support, resistance, and trend-lines while adding a deeper level of insight into market sentiment beyond the high low bars that dominated western trading until recently.
CMC Markets PLC posted the excellent video below called Trading strategy- Learn about the basics of candlestick charting.
What is a gap down chart pattern?
A gap is a change in price levels between the low and open of two consecutive days, where the open of the current day does not equal the close of the previous day so as to form a noticeable gap on the chart.
A gap down occurs when the opening price is lower than the previous day’s low.
Sasha Evdakov with TradersFly.com posted the excellent video below called Understanding Gaps: Common, Breakaway, Runaway, and Exhaustion.
What is a flag chart pattern?
A Flag pattern is a continuation pattern where a small rectangle pattern slopes against the current trend. If the trend is up, the flag will slope down. If the trend is down, the flag will slope up.
PerfectStockAlert.com posted the educational video below called Flag Continuation Chart Pattern.
What is a triangle chart pattern?
Triangle chart patterns are continuation patterns. Triangle chart patterns get their triangular shape from a contraction in price range and converging trendlines. There are three types of triangle chart patterns: the Ascending Triangle, the Descending Triangle, and the Symmetrical Triangle.
Ascending Triangle Pattern
The Ascending Triangle pattern is often a bullish pattern that ends in a breakout to the upside. The Bulls have been able to take the stock back up to resistance on each swing while Bears are losing the ability to take the stock back down to the support area on each swing. An uptrend should already be in place for this to be considered a continuation pattern.
Ascending triangles often take a few weeks to form on the daily chart.
Descending Triangle Pattern
The Descending Triangle is often a bearish pattern that ends in a breakout to the downside. The Bears have been able to take the stock down to the support area on each swing while Bulls are losing the ability to take the stock back up to the resistance area each on each swing. A downtrend should already be in place for this to be considered a continuation pattern.
Symmetrical Triangle Pattern
Unlike the Ascending Triangle (bullish bias) and the Descending Triangle (bearish bias), the Symmetrical Triangle pattern has no bias. It is a time of indecision where the Bulls and Bears are evenly matched. However, once the market figures out which way it wants to go, the pattern ends in a breakout either to the upside or the downside.
Sanjay Chowdary posted the video below on Ascending and Descending Triangle chart patterns. It is made for the FOREX market but the same principles hold true for equity markets.
PerfectStockAlert.com posted the video below on the Symmetrical Triangle chart pattern.
What is a head and shoulders chart pattern?
A Head and Shoulders chart pattern is a giant continuation pattern that ultimately results in a downside breakout or breakdown when it occurs after an uptrend. The mirror image of the pattern, when it occurs after a downtrend, is called a Bulllish Head and Shoulders bottom.
The price target coming out of the pattern can be estimated by taking the length of the highest point in the head to the neckline.
Head and Shoulders Top (aka Bearish Head and Shoulders)
The Head and Shoulders Top is a continuation pattern until the breakdown and then it becomes a reversal pattern. The Head and Shoulders Top is made up of a left shoulder, a head, and a right shoulder. The neckline is drawn at the lows of each valley and the pattern is not valid until the neckline is closed.
Head and Shoulders Bottom (aka Bullish Head and Shoulders)
All of the same points hold true for a Head and Shoulders Bottom but the logic is reversed. It too is a continuation pattern until the breakout and then it becomes a reversal pattern. The Head and Shoulders Bottom has the mirror image or the reverse of a left shoulder, a head, and a right shoulder. The neckline is drawn at the peak of each shoulder.
Sasha Evdakov posted the excellent video below called Stock Market Charts: Head and Shoulders Pattern.
Christian with PerfectStockAlert.com posted the excellent video below called Inverse Head & Shoulders Bottom Reversal Pattern.
What is a bearish engulfing candlestick chart pattern?
The bearish engulfing candlestick pattern is made up of two consecutive candlesticks: the first candlestick is an up day or green candlestick, while the second day is a down day or red candlestick.
The second down day body of the candlestick must completely engulf the body of the first up day or green candlestick.
The bigger the second down day candlestick is, the more bearish the reversal signal.
YourTradingCoach posted the excellent video below called Candlestick Charting – Vol 13 – Bearish Engulfing Pattern.
What is a diamond pattern in chart?
A Diamond pattern (aka Diamond Top Formation) is the end of an uptrend. It is a continuation pattern until the pattern ends with a breakdown below support and the lower trend wall of the Symmetrical traingle and then it morphs into a reversal pattern. The first half of the Diamond pattern is a Megaphone pattern or Broadening pattern, and the second half is a Symmetrical Triangle pattern.
Diamond patterns usually form over several months. Volume remains high during the formation of this pattern. The Diamond Top indicates a reversal to a downtrend while the Diamond Bottom indicates a reversal to an uptrend.
FinVidsDotCom posted the video below called Diamond Tops & Diamond Bottoms Chart Pattern.
What is the most successful chart pattern?
The most successful chart pattern is the oversold pattern. It works well in both trading and trending markets. However, what seems like an oversold level seldom is. This is why the oversold pattern must be used in conjunction with other technical and fundamental indicators, short interest days to cover, and catalyst research. The other technical and fundamental indicators are talked about in my other lessons. Make sure you subscribe below so you can get these lessons emailed to you.
What time frame should I use for the long lower shadow?
Use the daily (end of day) candlestick and a 6 month chart. A 6 month chart should be a long enough time span for you to see if the long lower shadow is occurring at a major support level.
If you are watching a stock in real time, then a long lower shadow will take place in intra-day action and it will most likely feel like a flush (the handle on a toilet going down then popping back up quickly). A flush is an excellent entry point.
Below are two charts of the same stock that formed a long lower shadow on the daily chart, and what it looks like in intra-day trading action.
Which time frame is the best for swing trading?
There are two time frames you will use for swing trading: the daily, and 1 hour.
The daily time frame is the time frame you use for your stock screener. A chart going back 6 months is good to use.
The 1 hour time frame is the time frame you use to look for an entry, target price, as well as exit. Think of the 1 hour time frame as using a magnifying class to zoom in and better time your trades. A 20 day chart is good to use.
For example, in our stock screener we scanned for stocks with a long lower shadow:
Looking at the 1 hour chart, we can see that our next area of resistance after the flush is the previous day’s close up around $20 and so that is our target level.
If that range is too tight because there’s not enough meat on the bone for the amount of money you are trading with, we pass on the flush and go back to our daily stock screener and look for another stock that formed a long lower shadow.
What is short interest as a percent of float?
Short interest as a percent of float is the percentage of shares short in relation to the number of shares that make up a stock’s float. Float is just a shorter word used for “shares outstanding”.
The formula for calculating short interest as a percent of float is:
For example, a stock with 2 million shares sold short, and 10 million shares outstanding, has a short interest of 20% (2 million / 10 million = 20%).
Many swing traders have developed trading systems that use short interest as a tool to predict market direction. The logic is that if everyone has shorted the stock (so that there is a high short interest as a percentage of float), then the stock is already near its low and will move up when short sellers have to cover their positions (buy back the shares to close out their short positions).
Do not confuse short interest as a percentage of float with the short ratio. The short ratio is calculated by dividing the number of shorted shares by the average daily volume of a stock:
For example, a stock with 24 million shares sold short, that has an average daily volume of 2 million shares, has a short ratio of 12 (24 million / 2 million = 12). It would take 12 days for short sellers to completely close out their short positions at the average daily volume.
Some traders prefer to use the short ratio because it provides a number that is used by traders to determine how long, expressed in days, it will take short sellers to cover their short positions.
PerfectStockAlert.com posted the excellent educational video below called Short Interest Ratio or Days to Cover Ratio.
What is a candle over candle formation?
A candle over candle formation, also called a candle over candle reversal, could be a Bullish Kicker:
A candle over candle pattern could be a flush or oversold pattern. A candle over candle pattern is a two day pattern and as long as the close of the second day of the reversal is above the high of the first day, it could qualify as a candle over candle pattern:
In the chart above, GNCA has done a sweet flush, with a candle over candle reversal coming out of an RSI oversold, with a sweet volume spike. That’s beautiful.
Here’s a candle over candle formation that took 3 days to get the signal:
The important lesson when dealing with candle over candle reversals is to not be too rigid with your definition of what a candle over candle reversal pattern is. In the chart of USAP above, after the doji on day one, an inverted hammer formed with the close of the day being almost even with the close of the previous day. This is not a good candle over candle signal. The long upper shadow suggests lots of selling near $30.50 and you don’t know if the price of USAP will just chop out and go sideways. However, the third day clearly closed above the close of both the previous two days and so we finally have our candle over candle reversal signal.
It is important that the candle over candle pattern occurs after an extended move down. You want the RSI to be oversold although that is not mandatory. The candle over candle formation should occur at some significant support area. Finally, the stock needs to have a history of bouncing and running off that significant support level.
What Is the Best Chart Pattern To Trade
Folks, I’ve been trading for nearly 20 years and I’m going to tell you, hands down, without a doubt, what I think the best chart pattern to trade really is. The oversold chart pattern is the best chart pattern to trade. The oversold pattern is also the best chart for day trading. But be warned. The real problem with buying stocks that are oversold is that they rarely are oversold. You know the same old story, buy low, and sell even lower for a loss. You’ve also heard the old cliche, “Don’t try and catch a falling knife.” Stocks that move lower often continue to go even lower.
What does stop limit order mean?
A stop limit order means that an order turns into a limit order when a stop price is hit. For example, let’s examine a sell limit order. If you place a stop limit sell order at $50, and the price of the stock drops from $55 down to $50, your shares would sell at 50 or above but not below the stop limit price. If the stop moved down quickly or gapped down below 50 before your order filled, the order would remain an open limit order. Etrade Pro calls stop limit orders, stop limit on quote orders but they mean the same thing.
Bionic Turtle posted the video educational video below called Order Types (market, limit, stop, stop-limit).
What is a trailing stop limit order?
A trailing stop limit order is a stop limit order that moves or trails the price of the stock. You set $5 as your maximum loss (you can set percentages like 5% too). This $5 follows or trails the stock price as it moves up and down. For example, let’s say you bought a stock for $55 per share. You set a trailing stop of $5 and a limit order of $49. If the stock drops from $55 to $50, your order is triggered and it becomes a limit order to sell your stock above $49. If the market drops fast below $49 before your order is filled, your order will remain an open limit order.
Sharekhan SK posted the excellent video below called How to use Trailing Stop-loss.
What are limit orders on etrade?
Limit orders on etrade allow you to set the price you are willing to buy or sell a stock. You can use limit orders on any online brokerage account, not just etrade. There are two types of limit orders etrade lets you set, a buy limit order and a sell limit order.
Buy limit order: Set the limit price as the maximum price you want to pay for a stock. Your order will execute at or below your limit.
Sell limit order: Set the limit price as the minimum price at which you are willing to sell your stock. Your order will execute at or above your limit.
Questrade posted the excellent educational video below called Stop Limit Orders.
What is a limit order book?
A limit order book is a record of unexecuted limit orders maintained by the specialist. It is a queue of orders waiting to be executed. The specialist has the responsibility to guarantee that the top priority order is executed before other orders in the book, and before other orders at an equal or worse price held or submitted by other traders. A matching engine uses the book to determine which orders can be fulfilled.
Yale posted the video lecture below from ECON 252, Professor Shiller, who talks about the history of securities exchanges from ancient Rome and the evolution of exchanges and limit order books, all the way up to high frequency trading and the Flash Crash from May 6, 2010.
What is a limit order example?
An example of a limit order is an investor who wants to buy a stock that trades for $17, but doesn’t want to pay more than $15 for it. The investor can place a limit order to buy the stock at $15. By entering a limit order rather than a market order, the investor will not buy the stock unless it drops to $15 or below. This is also called a buy limit order.
An example of a sell limit order is an investor who holds a stock that trades for $20, but doesn’t want to sell it for anything less than $22. The investor can place a limit order to sell the stock at $22. By entering a limit order rather than a market order, the investor will not sell the stock unless it climbs to $22 or above.
Goldenticker posted the video below called Basic Stock Trading Lessons – “Sell Limit” Order.
What is a buy stop loss order?
A buy stop loss order is a buy order executed at the limit price or higher. For example, if an investor is short a stock at $20, and the stock has dropped to $16 and he wants to protect his profits, he can place a buy stop loss order at $17 so that if the stock’s price rises to $17 or higher, his limit order will become a market order and he will buy to cover and close out the short position.
TimsEZconcepts posted the excellent educational video below called Stock Order Types.
What is a buy stop limit order?
A buy stop limit order is an order to buy a stock when the price rises to or above your desired entry point, but sets a limit on how much you are willing to pay. A buy stop limit order is used when a stock is trading below the price you want to enter the trade on. Many traders use buy stop limit orders to play breakout moves. For example, if an investor has a stock on his watch list that trades at $10, but he only wants to buy it if a breakout above resistance happens at $12.50, he can place a buy stop order at $12.50, with a limit set at $13. This means that if the stock climbs to $12.50, you immediately purchase the stock but if it goes above $13, you stop buying because you don’t want to chase the stock and pay too much for it.
Goldenticker posted the educational video below called Basic Stock Lessons – “Buy Stop Limit” Order.
What is a trailing stop loss?
A trailing stop loss is an order that follows the price based on either a dollar amount or a percentage. Traders use this type of order so that they can let their winners run but if the stock reverses and heads down, they can get out quickly. For example, an investor bought a stock at $20 and the stock is in an uptrend that has taken it to $30. The investor can place a 10% trailing stop loss order which, in dollar terms, will be $27 ($30 x 10% = $3. $30 – $3 = $27). If the stock continues to go higher, the investor will stay in the trade. If the stock rises to $33, the 10% trailing stop loss order will automatically trail behind and adjust to $29.70 ($33 x 10% = $3.30. $33 – $3.30 = $29.70). Now if the stock suddenly drops from $33 to $29.70 on a bad earnings release, the trailing stop will become a market order to sell the stock and exit the trade.
InformedTrades posted the excellent educational video below called Trailing Stops Easily With the 50% Rule.