In the classic golf comedy “Caddyshack,” the outrageously wealthy character played by Rodney Dangerfield gets a call from his stockbroker in the middle of the fairway. “I want you to SELL, SELL!” he yells into the phone, and then is stopped short. “They’re selling? Then BUY, BUY!”
There’s a nugget of market wisdom in that loopy dialogue: When everybody and his brother is selling, you can often grab a bargain by buying a stock as it bottoms out. Conversely, you can make some nifty profits by selling a stock when the fervor of buyers is at a peak.
Taking a couple of quick points off the board is a pretty good strategy, in our view, during this era in the market. Short-term investing is the name of the game. But if you’re not a day trader and must have your nose to the grindstone at work, you can’t closely monitor the action in your favorite stock to take advantage of a sudden price spike.
That’s when a sell order comes in handy. In the same way that a stop loss order protects the investor from downside risk, the sell order gives the investor the chance to maximize rewards to the upside.
It’s a simple procedure. If you purchase a stock at, say, 20 dollars share, you can immediately attach an order to sell the stock at perhaps 22, two points higher. If/when the stock price touches 22, a market order is triggered, and you pocket two points for a 10% gain.
You can adjust the order, setting it higher or lower at any time via your broker or electronically. You can cancel it at any time. You can be at the beach or on the golf course when the price hits your target and you cash in.
Here’s a situation where a sell order is particularly handy: Say your stock is poised to “gap up” at the open of the session and pop for several points because of good news (a new product, upgrade, merger, etc.). The problem is that the stock will often “fade” after the opening gap, reaching a peak in the first half hour of trading and then slowly sliding back. A four-point gain at 9:45 a.m. can dribble down to a one-point gain or nothing by 10:30.
If you recognize the good news before the open and realize that the stock is ready to gap, you can place a sell order a few points above the previous night’s closing price. If the stock closed at 20, you can place at the order at 22 or 23. At the open, there’s a good chance that the price will hitor exceedyour sell price, and you’ll be safely out of the trade when shares begin to fade. If it fades back to an acceptable level, you can always reenter the trade.
The risk is that the stock will gap and NOT fade. The price could hit 22, then 23 and continue through 24 and 25 before slowing down. You might leave some points on the table. But you’ve made a nice return on your investment, and you can still reenter the trade when you are again comfortable with the price.
Savvy traders try to grab every nickel of a gap open by shifting their sell order higher as the stock advances. If the stock gaps to, say, 22 and continues to move, the trader might place a sell order at 23. As the price approaches 23, say 22.75, he might cancel the live order and place another at 23.50. If the price heads toward 23.50, he can adjust to 24. This can continue until the trader is convinced that he is selling at or near the short-term top. All it takes is a few mouse clocks.
Remember, if your sell order is triggered and the stock fades to below your sell price, you can reenter the trade at the lower price. Essentially, nothing has changedexcept you’ve put some easy money into your account.
Plenty of traders use this technique while trading the Exchange Traded Funds (ETFs) that track the movement of the DOW–the “Diamonds”(DIA)and the NASDAQthe “Qubes” (QQQ). When the pre-market action in futures indicates a strong open for either of these indices, a well-placed buy order for these ETFs attached to a timely sell order can produce double-digit profits in a few minutes.
The technique also works in reverse for short sales in which the position gains in value when the underlying stock falls in price. If he senses a “gap down,” the trader simply places a “buy to cover” order a few points BELOW the current price. If the stock drops to his price, a buy order is triggered to cover the short for a quick profit.
Sure, some of these tactics are beyond the skill level or interest of many investors. But every investor should at least consider using a sell order whenever he places a new block of shares into his account.
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