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How conditional orders can help you lock in profits

Photo of Diana Houltham By Diana Houltham

min read

Keep strategy in place and manage risk while not watching the market.

Conditional Orders are a trading tool that can help keep your investment strategy on track even when you are not paying full attention to the market. You decide the price at which you want to buy and sell your securities, set your Conditional Order price levels and let your broker do the rest.

One of the key drawcards of Conditional Orders is that you can organise all your orders ahead of time, keeping to your trading strategy whatever the market is doing without the need to continuously monitor your portfolio.

Most brokers offer Conditional Orders valid for around 12 months. For infrequent traders, these orders can be a key part of a trading strategy, allowing the order to be placed well before the actual trade is entered.

Conditional Orders may be used to execute either sell or buy instructions, for:

  • Locking in gains (profit management).
  • Managing downside risks (risk management).
  • Executing trades at a target price (position management).

Most traders are familiar with stop-loss Conditional Orders, through which you enter an instruction to trigger a sell order on a security once a price is reached. This kind of order is popular in volatile markets to help with risk management.

There are, however, many other types of Conditional Order that can be successfully used by both frequent and infrequent traders and investors.

Conditional Orders for profit management

Order Type Purpose Example
Rising Sell Order

May help you take profit when a security price rises.

Allows you to instruct your broker to sell some or all of your securities in a company when the unit price rises to the trigger level you have set.

You have purchased a security for $10.00 and wish to place a sell order once it reaches $11.00.

By creating a Rising Sell order with a trigger price of $11.05 and limit price of $11.00 your broker will automatically enter a sell instruction with a limit price of $11.00 once the security reaches $11.05.

Trailing Sell Order

May help you achieve profits when a security price changes direction from rising to falling.

Allows you to instruct your broker to sell some or all of your securities in a company when the price rises to a level you have set as your trail start price and then experiences a fall equal to or greater than a trail stop value.

You have purchased a security for $10.00 and wish to place a sell order once it reaches $11.00. However, you are happy to risk selling lower to try to maximise any upside resulting from the positive momentum.

By creating a Trailing Sell with a trail start price of $11.05 and a stop value of $0.05, a trail will begin when the security price rises to or beyond $11.05 and a market order will be fired by your broker the next time a fall equal to or greater than $0.05 occurs.

Conditional Orders can help you lock in gains as well as make the most of favourable market movements. You decide how much profit you would be happy with and sell when the security price reaches your target.

 

Conditional Orders for risk management

Conditional Orders can be particularly useful for managing downside risks and limiting losses in times of market volatility.

If you are concerned about a large price movement downwards, you may consider using a Conditional Order that will trigger a market trade instruction on your holdings once the price has fallen by a certain amount.

Order Type Purpose Example
Stop-Loss Order

Also known as a Falling Sell, this order can help you lock in your gains or limit your losses in a falling market.

Allows you to instruct your broker to sell some or all of your securities in a company when the price falls to the level you have set as your trigger. You may also set a limit price, below which your broker will not sell.

You have purchased a security for $10.00 and wish to sell your holdings if the price falls to $9.00.

By creating a Falling Sell with a trigger price of $9.10 and a limit price of $9.00, your broker will automatically place a sell order with a limit price of $9.00 when the price falls to $9.10.

Conditional Orders for position management

Conditional Orders enable you to manage your portfolio positions to take advantage of market movements, buying securities as prices fall and moving into momentum securities as they rise.

Order Type Purpose Example
Falling Buy Order

May help you invest in a security when it becomes ‘good value’.

Allows you to instruct your broker to buy when the unit price falls to or below the price you have set as a trigger. You can also set a limit price, above which the broker won’t buy the security.

A security is trading at $11.00 but you believe it is overvalued and are only willing to invest if the price falls to $10.00.

You can create a Falling Buy trigger with a trigger price of $9.55 and a limit price of $10.00. When the security price falls to $9.55 a buy order is automatically placed, with a limit price of $10.00.

Trailing Buy Order

May help you achieve profits when a security price changes direction from falling to rising.

Allows you to instruct your broker to buy a security when the unit price falls to or beyond a level you have set as your trail start price and then experiences a rise equal to or greater than a trail stop value you have set.

A security is trading at $11.00 but you wish to purchase it for $10.00. You are unsure whether the price will correct, but believe a rise of 1% is big enough to suggest an upward swing is occurring.

You can create a Trailing Buy order with a trail start price of $9.91 and a trail stop of 1%. This means a trail will begin when the price falls to or beyond $9.91 and a market order will be fired by your broker the next time a rise equal to or greater than 1% occurs.

Rising Buy Order

May help you take advantage of a security that’s on the rise.

Allows you to instruct your broker to buy a security when the unit price rises to the level you have set as a trigger or above. You can also set a limit price, above which the broker won’t buy.

A security is trading at $11.00 but you believe this is low and the company should recover strongly. You would like to buy when that recovery begins.

You can create a Rising Buy with a trigger price of $11.25 and a limit price of $11.30. When the price rises to $11.25 a buy order is automatically placed with a limit price of $10.30

Remember that Conditional Orders are not guaranteed by brokers and may carry the following risks:

  • If the market is moving fast, there is a risk your limit order will not execute, or your market order will execute at a much less favourable price point than your trigger conditions.
  • Highly volatile securities may trigger Conditional Orders and then move against you, leaving you out of pocket.
  • Conditional Orders are taken on a “best endeavours” basis. In the event of system failure or corporate action (ex-dividend, reconstructions and rights issues) your order may be cancelled.

These risks generally can be minimised by setting your trigger and limit prices carefully and researching the securities in your portfolio.

Before placing a Conditional Order you should read and understand the terms and conditions provided by your broker.

You can place and manage unlimited Conditional Orders online through CommSec, now free. Brokerage will continue to apply for buy and sell trades.

About the author

Diana Houltham is senior product managers (equities) at CommSec.

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