In praise of Limit Orders

I’ve been busy in the last few months.  I’ve bought a house, and to support this I’ve dramatically restructured by investment portfolio.  And I’ve never been more grateful for Limit Orders.

What is a Limit Order?

As most of my readers will already know, a Limit Order is an order to buy or sell a particular asset (usually a company’s shares, or an ETF) only when the price reaches a particular point before a deadline.

The alternative to a Limit Order is a Market order, which means to buy/sell that asset right now, at the current market price.

A Limit Order means to buy/sell only provided a price condition is met.  By definition this condition might take some time to occur, or may never occur, and hence you need to set a deadline.  This deadline might be ‘next trading day’ or it could be several weeks away.  In my experience brokers don’t like deadlines longer than about 3 months away.

What do I use Limit Orders for?

In recent weeks, I have found myself using Limit Orders in five scenarios:

  1. Placing trades 24/7. I invest in stocks on three key exchanges: in the UK, Australia and the US.  And I tend to make trading decisions out-of-hours, at least by UK standards.  I do so on weekends.  I do so during evenings.  In other words, I make my decisions when the market is closed.  And when the market is closed the only trades you can place are Limit Orders.
  2. Range trading. Some assets are ones I am broadly happy to buy whenever they dip, and happy to ‘top slice’ by selling some of when they soar.  This is known as range trading.  Examples of stocks you can range trade: ISF (buy below 5950, sell above 6400), VUKE (similar to ISF), DGE (buy below 1800, sell above 1850), VOD (buy below 200, sell above 225).Screen Shot 2016-03-11 at 23.35.05
  3. Trading illiquid stocks. Some stocks have very thin trading volumes, so even a modest buy/sell order can move the price significantly.  One solution for this is using Limit Orders.  It may take a few days to complete the trade but it will be at a consistent price.
  4. Liquidating a portfolio. When I was releasing funds to buy the Dream Home in January, the markets were highly volatile.  I didn’t want to sell assets which had just plunged in value.  But some assets were blipping up.  My solution was to set limit orders for a range of holdings at prices which were slightly higher than the market price.  Sure enough, some of these shares then rose over the next few days – my Limit Orders acted as a net scooping flying fish out of the water, but leaving the others untouched.  Once I had enough cash realised, I cancelled the remaining Limit Orders.
  5. Catching bargains. Occasionally I will decide I would like to own an asset but only if the price falls to such and such a level.  Limit Orders can be very useful for buying this sort of asset without needing to monitor them all on a daily basis. I recently bought ARM, for the first time, when it dipped down to £9.00/share for only the second time in 18 months. Already, it’s back up to almost £10/share.

Limitations of Limit Orders

Limit Orders don’t work for everything.  They don’t work for Unit Trusts.  They don’t work for certain stocks and ETFs – annoyingly this includes some pretty key iShares ETFs that I hold.

In Australia my main stockbroker only allowed limit orders with a 24 hour (or one trading day) expiry. This ruled out much of the point of them, but did allow me to place trades out-of-hours – which is essential for investing in Australian-traded securities.

In conclusion, if you’re not using Limit Orders, I encourage you to think about how they could be useful for you.



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