Trading Pal Blog

Some people trade on a hunch others just follow the market. Even though the market can only go in 3 directions (up, down and sideways) I do not make assumptions on what should occur on the day.

These days brokers (especially CFD brokers) provide a range of pending orders which can make you more efficient as a trader. Let's review them for starters. A stop order will automatically open a position for you if the market goes beyond a given price. A limit order will close an existing position if the market reaches the limit price. Instead of being independent orders can be grouped in pairs with the OCO attribute (One Cancels the Other). This gives us the basis for an automated trading setup as follows.

Let's say an index you want to trade is currently quoted at 4740. If it moves up to 4750 you will take up a long position. If instead it drops to 4730 you will enter a short position. If the market trades as high as 4770 you count your blessings and collect your profit with a limit order at that price. In the other scenario if the short position gathers momentum you will close it with another limit order to buy it back at 4710.

Nifty isn't it? What if things go wrong? That's where the OCO comes into play. The two buy pending orders are linked and will cancel one another. Likewise the two sell pending orders also are linked and will cancel one another.

There are therefore 4 possibilities. The market currently is trading at 4740. If it goes up and reaches 4750 the stop buy order is triggered cancelling the other buy limit order at 4710. You are left with a long position sandwiched between a sell limit order at 4770 giving you a 20 points gain and a sell stop order at 4730 giving you a loss of 20 points.

The other scenario is a market dropping from 4740 down to 4730 hitting your sell stop order cancelling the sell limit order at 4770. You are left with a short position sandwiched between two buy orders: a limit down at 4710 giving you a 20 points gain and a stop up at 4750 giving you a loss of 20 points.

The beauty of such a setup is that you can place your 4 pending orders at the opening of the session and walk away from the computer to attend to whatever you do besides trading knowing that you will either make a 20 points gain or a 20 points loss.

Some might say that's as bad as flipping a coin in the air. Not quite. Keeping a log of your trades and being consistent, persistent day after day will reveal if a profitable pattern emerges. Another refinement is moving the remaining stop order back to the price current at the opening of the session. This would bring down the potential loss to 10 points only while the potential gain remains 20 points. The risk though is that in a volatile market the 10 points stop might be hit even though the market did reach the 20 points limit afterwards. Something to think about. Being tight fisted is not always rewarded. Only your trading log will tell you what is wise and what is not.

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