Types Of Stop Orders
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One of the best things a trader or an investor can do is preserve capital. The easiest way to do so is through a stop order. A stop order, often referred to as a stop-loss order, is a type of order that gets you out of an investment or trade when the investment or trade hits a specified price, to essentially stop you from further losses.
Stop Orders
A stop order turns into a market order when the price level or percentage is breached, getting you out of a stock or ETF as soon as possible at the market price.
Example: You buy 10 shares of a stock at $10.00 and enter a stop order for 10 shares at $9.00 (or 10%, some brokers do not allow percentage.) The stock moves around before heading lower and breaching the stop set at $9.00. Your stop order now becomes a market order selling 10 shares at the market price.
Stop Limit Orders
A stop limit order is much like a stop order, expect when the stock breaches your stop price/percentage, it creates a limit order instead of a market order.
Example: You buy 10 share of a stock at $10 and enter a stop limit order to sell 10 shares when the price hits $9.00 and for the limit order, you enter $8.75. The price of the stock hits $9.00, which then creates a limit order to sell 10 shares at or above $8.75.
Note: With stop limit orders, if the stock gaps down overnight, you run the chance of not getting your order filled.
Trailing Stop Order
Trailing stop orders are for those who want to limit their losses and lock in profits without actively monitoring the stock market. A trailing stop order is a stop order that moves up with the price of the stock.
Example: You buy 10 shares of XYZ stock for $10.00 and enter a trailing stop order at $1.00 below the buy price. Your trailing stop order moves up with the price of the stock, never allowing your stop order to trail the price of the stock more than $1.00.
Trailing Stop Limit Order
A trailing stop limit order, like the trailing stop order, limits losses while locking in profits. A trailing stop limit order turns into a limit order upon breaching a specified price level.
Example: You buy 10 share of XYZ stock for $10.00 and enter a trailing stop limit order of $1.00 for the stop and $1.25 for the limit. If the stock never goes up and starts falling, you should get out at $8.75 or higher. As with the trailing stop order, a trailing stop limit follows the stock up never allowing your stop to lag the price of the stock more than stop limit, in this case $1.00. Now, say the stock moves up to $12.50, then turns around and starts dropping. The stock hits your trailing stop, which is now at $11.50. In theory, your limit order will get you out at $11.25 or higher.
NOTE: Like the stop limit order; if the stock gaps down, you take a chance of not getting your order filled, as the bid is lower than your limit.
Placing Your Order
Different brokers offer different types of stop orders and some broker have limitations on certain types of stops such as limiting trailing stop orders by only allowing you to place them if you have more than 100 shares. The stop order can be placed either on the bid, the ask, last price etc. Be sure to place the order according to your plan or research.
Shorting Stock and ETFs
Stop orders work with shorting stocks as well. Instead of the stop being below the price of the stock, it is above it. If you are shorting stocks, I highly recommend that you place some type of stop order.
Pay Attention To Volume
If the stock or ETF that you are trading or investing in has low volume, a stop order or trailing stop might get you out at a price way lower than expected. When trading lower volume stocks or ETFs, you should consider using stop limit and trailing stop limit orders.
Where To Stash Your Cash
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With the recent and ongoing economic crisis, Americans are changing their fiscal habits. One of these changes is the way we save money. We are now saving more than we have in recent history. As this recession has showed us, many jobs that we thought of as secure are anything but secure. This lack of security causes more people to put money away for hard times in the future or what is commonly referred to as an emergency fund. So, where is the best place to stash your cash?
IGoBanking – This online only bank is always among the top of high yield savings accounts and offers one of, if not the, best interest rates on savings; currently yielding 1.91%.
Ally Bank – formally a division of GMAC. Yeah, your taxes probably paid for this bank. This bank receives constant criticism over their high savings rates taking funds from away from credit unions, after taking taxpayer money. Their no-penalty CD currently yields 1.9% APY and a savings APY of 1.85%. Both require no minimum deposit.
These are two of the best yields that your will receive on cash. You should have at least on year’s worth of income saved in an emergency fund and these are two places to start, if you have not already.
If you already have an emergency fund, start building an income portfolio along with a growth portfolio. If you are not comfortable investing your own money, buy into an index fund such as the S&P 500 (SPY) and make regular purchases.
Trading The Head And Shoulders Pattern
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One of the most popular technical patterns is the head and shoulders pattern. The head and shoulders pattern indicates an uptrend’s reversal and is a reliable pattern with a high success rate. Does it mean that it will work every time? No, does any indicator or pattern work 100% of the time? I trade trends and the head and shoulders pattern is not a pattern I choose to trade against, as the pattern tends to be correct more times than not once confirmed. What is a head and shoulders pattern and how do you trade it?
Head And Shoulders Pattern
A head and shoulders pattern is one type of reversal pattern that indicates an end to an uptrend and a beginning to a new downtrend. Look at the picture below (current S&P 500 chart with a head and shoulders pattern) before I explain a head and shoulders pattern and how to calculate where, based on the pattern, the market, stock, or futures, etc. is going.
Head And Shoulders Pattern Explained
The left shoulders forms in a natural uptrend as the stock makes new highs then falls back (or corrects to what will be called the neckline, this will be the first point of the neckline) before pushing higher to make new highs (head).
After making new highs, the security then falls back from the head to previous lows where it finds resistance. This resistance is from the prior pull back.
The security will start to push higher, and will be unable to make new highs. It is as this time you will notice the formation coming into play. This upward push is the beginning of the right should and is unable to get through the highs created in the left shoulder. It is at this time that you need to connect the two pullback points to create the neckline.
Confirmation of the pattern comes when the security passes through and holds the neckline. Traders will start getting into short positions at this time. As you can see from the chart above, the S&P 500 has not yet broke the neckline. The upcoming week will be an important week as to whether the uptrend is over.
How To Calculate The Potential Move
In an equation, it looks like the follow:
Neckline – (High Point in Head – Neckline) = Price Target
Using the image below (DOW Head and Shoulders Patter), take the high point of the head which is roughly 8,800 and the neckline which is about 8,200. In short, you can expect to see a 600-point move to the downside.
8,200 – (8,800 – 8,200) = Price Target
This gives a price target of 7,600 on the DOW. I recommend that you get out before taking out the target unless the markets or a security (whichever you are trading) is falling apart.
Things To Keep In Mind
- The volume is normally highest in the left shoulder. As the stock reaches new highs (in the head), it is usually not supported by volume.
- The neckline does not have to be perfectly horizontal, it can slightly move up or down.
- Shoulders should peak around the same price.
- You do not have to get short positions but should at least lighten up your holding(s) and buy them at cheaper levels.
- Head and shoulders patterns can be used with all types of securities, whether an individual stock or index futures.
Add Some Junk Bonds (JNK) To Your Income Portfolio
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If the market is in a sideways or downward movement, you may look at overweighting in bonds. In my income portfolio, I am slowly adding bond positions as I expect the market to continue lower. With the S&P 500 and the Dow forming a head and shoulders pattern (bearish technical pattern), the markets are heading for a correction, as investors got a little too bullish too early.
JNK vs SPY
SPDR Capital High Yield Bond Portfolio ETF (JNK) gets it ticker from the bonds the ETF holds which are less than investment grade. Since they are less than investment grade, many refer to them as “junk bonds”. When compared to a two-year chart with the S&P 500, SPDR Capital High Yield Bond Portfolio ETF (JNK) outperformed the S&P 500 SPDR ETF (SPY). Not only did JNK significantly outperform but it also returned a monthly dividend currently yielding around 14%.
Other High Yield Bond ETFs
iShares iBoxx High Yield Corporate Bond ETF (HYG) and PowerShares High Yield Corporate Bong ETF (PHB) are two more ways to play high yield bonds as they track different indexes and currently yield 10.5% and 11.26%, respectively.
DISCLAIMER: I do own shares of JNK.
ETFs For Investing In The BRICs (Brazil, Russia, India, and China)
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One of the best places to invest money is in emerging markets, preferably in the BRIC countries. The BRIC countries (Brazil, Russian, India, and China) have outperformed the U.S. Stock Markets over the last few years. With approximately 40% of the world’s population, the BRIC countries have room for rapid growth with better returns than US markets.
Brazil
Brazil is my least favorite of the BRICs but still offers a chance to make money. The ETF that I use for trading Brazil is iShares Brazil Index ETF (EWZ). EWZ is a trade rather than an investment because of its exposure to oil and currency. Some may like EWZ for an investment; I would rather play individual stocks for investing in Brazil.
Russia
If commodities are not in play, watch out for Russia. Although, Russia offers opportunity, it is highly exposed to oil. If the rapid growth 0f China and India continues, they will need oil to fuel their growth. Market Vectors Russia ETF (RSX) will get you in the Russian trade.
India
India is right there with China in terms of growth. Not many economies are still producing a positive GDP (gross domestic product), India along with China are. If you already have a position in China, start building a position in India using the WisdomTree Earnings Weighted India ETF (EPI).
China ETF
China is my favorite of the BRICs as China has the highest growth rate and expectations. China, with the largest population in the world, a growing middle class, and manufacturing that the world depends on, offers a great investment opportunity. Investors that want exposure to China can do so through iShares China 25 ETF (FXI). This ETF invests in the top 25 largest and liquid Chinese companies.
Exposure To All BRICs Through One ETF
If you are looking for one ETF to get exposure to all the BRICs, try Claymore BRIC ETF (EEB).
BRICs Are Great For Trades And Investments
These ETFs make for great investments and trades but please understand the risk associated with each. The ETFs listed are not the only ETFs to get exposure to the BRICs but are ETFs with good volume levels, making it easier to get in and out.