Using a Limit Order to Sell

Once shares of stock are owned, using a limit order to sell is one of the stock trading order types available to you as a trader to help manage the open position.

One of the benefits of using order types other than a basic "Market" order to close out a position is that they can be placed in advance. Not only is this helpful to traders who aren't available during all hours of the regular trading session, but it's also helpful because it takes some of the emotion out of the trading process.

If you don't already know, emotions and trading don't mix together well and more so for some than others.

Here's a quick definition to get started: A limit order to sell stock for a position you already own shares in causes the stock to become eligible to be sold at or above the limit price YOU specify, but never below it. Keep in mind that although a Limit Order allows you to specify a price limit, it does not guarantee that your order will be executed because 1) prices may never reach the limit price and 2) there must be enough demand available to purchase your shares when your order becomes live in the market.

I emphasized #2 above because I've had limit orders in place, my limit price was reached, but my shares did not sell because only a few shares actually traded at or above my limit price before reversing and moving lower, and quite a bit lower on more than one occasion.

Let's go through an example of using a limit order to sell shares of a stock recently purchased (although it doesn't even have to be "recently" purchased, the shares could have been purchased any time in the past):

Example Using a Limit Order to Sell Shares of Stock Held in an Account

  • On December 1, 2011, a trader (we'll call him Bob) purchases 1000 shares of BAC (Bank of America) for $5.50 each. 1000 shares x $5.50= $5,500 cost plus commission.
  • Bob performs research and looks at some technical analysis for BAC and thinks BAC should go to $6.00 per share easily, over the next few weeks.
  • Bob decides he is going to use a "mental stop loss" using end-of-day prices and check the price of BAC daily.
  • Bob decides his per share price target for BAC based on his technical analysis is $6.00 per share. This also meets his general guidelines for a profit target per trade.

  • Since prices fluctuate, sometimes widely, during the day when Bob is not available to monitor what's going on, he decide's to enter a "Sell Order for 1000 shares with a Limit Price of $6.00/share" as soon as he purchases the original shares for $5.50 on December 1, 2011.

  • Days and weeks go buy and BAC stays below $6.00, then on January 5, 2012 prices move up through $6.00 during the day, as they do, Bob's "Sell Order for 1000 shares with a Limit Price of $6.00/share" triggers and becomes a live order sent to the market and as more shares are traded at $6.00 or above, his shares get sold for $6.00 or higher per share.
Using a Limit Order to Sell

In the example above, the trader was able to set a "pre-determined" profit target as soon as the original shares were purchased and then have his shares automatically sold at that "pre-determined" price or above once the share price was reached.

As mentioned earlier, some of the benefits here were that emotions were taken out of the trading scenario (somewhat) during the rollercoaster price fluctuations AND shares were automatically sold without having to monitor the position on an intraday basis.

In actual practice, prices could have never gotten to the $6.00 price target (although $5.00/share or thereabouts seems to be resistance for BAC as of late) and instead moved lower so consideration should be given to using good stop losses and position sizing as well.

As a final note for this article, using a limit order to sell is not suited for everyone nor every type of trading. If you're scalping intraday, you'll likely want to get out of your positions instantly using a market order, as long as the volume is there also, and if the volume is not there, the stock shouldn't be scalped in the first place.

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