Using A Contingent Order

A "Contingent Order" is an advanced type of order that can be placed with most online stock trading brokerage accounts.

It is just one of several types of Conditional Orders that can be used and each type has specific uses.

This type of order can be placed if you would like to enter a trade only if certain conditions are met (contingent). It also allows you to place the order without having to sit in front of your computer screen and wait for these conditions to occur.

If two conditions have to be met, it is then called a "Multi-Contingent Order". For the purpose of this commentary, I will be referring to either a single or multi-contingent order as one.

For example, using my chart of HUM (Humana- November 2008) from my Trend Lines page and shown below, you decide that if HUM opens or goes above the top trend line at $30.00 after the last day shown on the right hand side of this chart, you would like to place an order to Buy shares of the stock.

HUM chart

Say you had to go to work that morning or you just didn't have time to watch your computer screen that day. You could place a "Contingent Order" stating that if the price of HUM is above $30.00, then enter an order to BUY shares of the stock.

Here is a sample Contingent Order screen from Fidelity:

contingent order

Notice that you can set several of the variables that have the dropdown arrow, and each dropdown has several options to choose from.

The first variable, "Trigger", has the following options to choose from: Last price; Bid; Ask; Volume; Change Percentage Up; Change Percentage Down; 52 Week High; and 52 Week Low.

The next variable, "Direction", has the following options to choose from: Less Than; Less Than or Equal To; Greater Than; Greater Than or Equal To.

The other variables are standard options such as Day or Good 'til Cancelled, Buy or Sell, etc.

In our example above, we would enter the information as shown which says that if the last price of HUM is greater than or equal to $30.10, then place an order to Buy 100 shares at a limit price of $30.30.

Notice I used $30.10 as the trigger price, and not $30.00. I did this because $30.00 is the top of the trend line and also a round number, which provides some additional psychological resistance. Using $30.10 will allow for the trend line and round number resistance to be broken before we enter our order.

Since I used the "last price greater than or equal to" $30.10, we also have to be careful and make sure we do not enter a "market buy order" to be placed upon the trigger condition being met.

You can see that in the "place this order" part of the screen, I entered an order type of "limit" with a max price of $30.30. This is to make sure that if the price of HUM opens up, or shoots higher to say $33.00, our order does not get filled at a price higher than we are willing to pay. Make sure you understand this before placing any type of conditional order.

By having an order placed only if certain conditions are met by using a Contingent Order, you are helping to manage your risk in several ways:

  • First- By only entering a trade or position at a price that you have already determined to be a good entry point.
  • Second- By not having the order being placed if the stock price moves in the opposite direction of what you thought.
  • Third- A contingent order can help you by keeping emotions out of your trading decisions. If you have certain guidelines to enter trades that you already know work, placing a contingent order can help you stick to your trading plan by automating your entry.
  • Fourth- A very important benefit is that your order is not live in the market for everyone to see what you are willing to buy or sell a stock at. Just imagine a stock at $30.00 and you place a live order stating that you are willing to pay $30.30. Of course someone will sell it to you at a higher price than what it currently is, right? This order type will be held at your broker until the trigger criteria are met, before going live into the market.

In my example above, if you placed an order to buy HUM at a limit of $30.30 on Sunday night without using a contingent order and HUM opened up at $29.90, your order would get filled, possibly close to $30.30. Then if the price went down the rest of the day, you would have gotten in at the highs of the day.

By using the Contingent Order, your buy order would never have been filled and you would not have an immediate loss on your hands.

Always remember, check with your individual broker to see what order types they offer and read their specific guidelines for each type as they may vary between brokers.

Related "Contingent Order" Pages on This Site:

Return From "Contingent Order" To "Stock Trading Risk Management"

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