Stocks are surging to record highs today, ahead of some critical earnings announcements after the close that include: eBay, Snap, and Texas Instruments. However, I remain focused on trading small-cap penny stocks. After all, it’s my bread and butter, and what I traded to boost three small accounts last year by 220%, 270%, and 600% respectively.
That said, I have been getting a lot of attention from the trading community after I released the Profit Prism a couple of weeks ago – the five-step plan I use to grow small trading accounts larger.
(don’t let the suit fool you… I trade from home because it gives me more time to spend with my wife and kids… if you missed my presentation on the Profit Prism click here)
And you know what?
I almost always tell someone who gets started with me to paper trade first. You see, it’s not just about learning how the trade ideas work…
…but it’s also about the EXECUTION.
For example, certain order types can destroy your trading account. In other words, how you enter or exit a trade can mean the difference between posting a profit or a loss.
That said, there are 3 order types you must know. They are not hard to learn and are available on all brokerage platforms. However, the average trader isn’t aware of them and how they work.
Read on learn what they are and why I believe they will save you money and help you make more. Also, included is the one-order type that will do the most damage to your account and why you should avoid it.
One question I often get asked is, “What order types should I use when I’m trading penny stocks?”
When you’re first starting to learn how to trade… you need to understand which order types to use because they could save and grow your account.
For example, the most basic order type is the market order. With this order type, you’re simply buying at the market price. If you don’t know yet, buyers bid at a price, while sellers ask (or offer) at a price.
Now, if you’re trying to buy a penny stock, and you enter a market order… you are taking the offer price. On the other hand, when you enter a market order to sell, you would sell at the best bid price.
Beginner traders use this order type all the time… but experienced penny stock traders know it’s an order type that could damage your account.
Think about it like this… what happens if you enter a market order to buy a penny stock… and the seller pulls their order and the next best offer is 5% higher than where you thought you would buy the stock.
That means you just paid a massive spread… and that’s one of the quickest ways you can damage your account… I’ve seen bids and offers being pulled all the time.
So what order types should you be using?
Well, there are three order types I use all the time:
- Limit order
- Stop loss (Stop loss limit order)
- Buy stop limit
Now, this order type is one that I use all the time. Unlike the market order, you’re guaranteed the price you enter. However, with a market order, your order will be filled. You see, with a limit order, your order to buy or sell shares of a stock will not get filled unless it trades at that price.
Here’s a look at how a limit order to buy a stock would look using E*Trade’s platform.
With this limit order example, you would be buying 1,000 shares at $0.0293. Now, unless the stock trades at $0.0293 (or lower) your order would not get filled. You might think, “Well, Jeff, what happens if I really want to get into a stock?”
Well, in my opinion, it’s better to wait for the right price, rather than getting the execution.
Well, technicals work with penny stocks – and I have a few battle-tested strategies
This order type is great, especially when you’re using chart patterns to trade.
For example, just yesterday, I used the limit order to make 20% in a trade.
For example, I used limit orders to buy shares of PTOP at $0.0041 and $0.0042… because those were the prices I wanted… and I also placed a limit order to sell my shares at $0.005 after my order was filled.
Basically, I bought the break out, and was looking to sell my shares near the stock’s previous high (or resistance level) at $0.005.
The limit order is a useful tool that I think all beginner traders should use.
Next, we have the stop-loss order (stop loss).
Next, we have the stop loss and stop loss limit order. Now, the stop loss order is like a hybrid between a market order and a limit order. However, the stop loss limit is used to protect you against losses. For example, let’s say you buy a stock just above a support level (an area where buyers have bought the stock, causing the stock to bounce off that area). With technical analysis, you would traditionally stop out below that support level.
Let’s say the support level is $5.00 and you bought shares at $5.25. Ideally, you would want to get out around $4.90 or so just to leave some room for slippage. So you would put a stop loss order at $4.91.
Now, the price that you enter with a stop loss is known as the trigger price. So once the stock trades at $4.91, the stop loss order goes live, and you would sell your shares at the next best bid.
Similar to the market order, if your stop loss order is triggered, you would be guaranteed a fill. Remember the problem with the market order? Well, if your stop loss gets triggered and the next best bid is $4.50… then that’s the price at which your order will get filled.
Stop Loss Limit Order
That’s why I don’t use the stop loss as much. However, I do use the stop loss limit.
With the stop loss limit, you are protected. You see, with the stop loss limit… you have a trigger price and a limit price. For example, here’s a look at the stop limit order box on E*Trade’s platform.
Basically, the stop price is your trigger price. So if you wanted to stop out at $4.90 (continuing from the example earlier)… you could put the stop price (trigger price) at $5.00.
Thereafter, you could set the limit price at $4.90. If the stock trades at $5.00, your limit order to sell at $4.90 becomes live.
Thereafter, if the stock trades at $4.90 (or better) you would sell your shares around that price (taking into account slippage).
Moving on, there’s a third order type I like to use: the buy stop limit.
Buy Stop Limit Order
Now, with this order type… it acts like a stop loss limit order. However, this time, it’s not to protect you against losses… it’s used to get into a stock.
For example, if you notice a bullish break out pattern, the buy stop limit order would be useful. Now, let’s say you notice one of my favorite patterns to trade – the Staircase to Profits.
Basically you notice the stock trend higher, then trade in a range. Now, if you want to trade the pattern, you could look to buy the stock just as it breaks out of the range-bound area.
Here’s a look at what I’m talking about.
So with this trade, the break out would be when the stock trades above $1.09. So you could’ve put a buy stop limit order – with the stop price (trigger price) at $1.10 and a limit price at say $1.15.
That said, if the stock trades at $1.10 or higher, your stop price would be triggered. Thereafter, the limit order becomes live… if the stock trades at $1.15… you would be long shares of the stock.
Remember, market orders are bad for penny stocks, and these three order types are superior.
When you combine the three order types… it gets pretty easy to trade. That’s what allows me to just actually trade for less than an hour… while generating high returns like these.