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This is where your new best friendthe direct access broker and its electronic trading platformcan really help. Use Nasdaq level II to help you with the timing of your order, anticipate when your strike prices will be hit, and get the "smart order logic" warmed up so you can be ready to jump in quickly and get the execution at the price you want. |
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BUT don't ever actually get into your trade before your entry point has been executed and painted to the tape! There is a reason why you want that price to be established ahead of you, so wait for it. |
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Take advantage of the three different kinds of orders: |
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1. To Enter a Trade. Use a stop limit order to enter a trade at some point in the future according to your trading plan. For example: "Buy 1000 IBM 85 stop 85 1/2 limit." You either get the price range you want or you pass on the trade. |
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2. To Exit a Bad Trade. Use a stop order to get you out of a trade that is going against you at the price determined ahead of time by your trading plan. For example: "Sell 1000 IBM 84 stop." You do not want a limit on this order. If you hit your stop price, you want out of this trade at the best price you can get. |
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3. To Exit and Take Your Profit. Use a stop order to get you out of a trade once your profit objective has been reached. The ability to issue and to manage stop orders is vital to trading with a high-probability trading plan. |
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What do you do if your stock has gapped beyond the entry point plus the slippage at the open? |
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First, don't do anything just yet. For certain do not go chasing it. Be patient. One of two things is at work. Either there is a real market reason for this gap or there is not. |
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Our observations have taught us that we should know if this gap is "real" about thirty minutes after the open. Here's what you do: |
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For a Buy: After thirty minutes, set a new entry point 1/16 above the high for this day. Also, set a new ISP to be 1/16 below the low for the day. If, after 30 minutes, the stock then can make a new high, the strength shown by that gap is real. |
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