Definition: A sell limit order is a type of limit order. It is specifically to sell a security at an exact price or above. In other words, the exact price would be a price you the trader are willing to sell at least. Using this type of order will make sure you don’t sell for less than your specified price. You get a price guarantee so you sell at the highest price possible. In the long term increase profits by minimizing slippage. However, there is no guarantee that your order will be executed. If the market price doesn’t go up to the exact price you specified, your order will not get executed.
Types of Limit Orders
How to Use a Sell Limit Order
When you’re selling the goal is to sell at the highest price possible. Because there are no guarantees in execution. A limit order will not get filled if your price is too out of range. So we have to determine a sell limit order price that is reasonable. Setting a price to high will have your order sitting UN-executed into the next trading day.
Learning how to trade stocks efficiently requires just a little study in technical analysis. Determining the reasonable price is done by analyzing the stock chart of the stock we are trading. By notating important price levels, chart patterns, and technical indicators we can derive a reasonable price to set our sell limit order. Keep in mind we are applying sell limit orders that is congruent with Breakout Theory’s trading system. There are many scenarios. By studying this tutorial you should be able to apply the concept to other unique trading situations.
Sell Limit Order Example
Let’s take a look at NFLX. After a phenomenal run Netflix came crashing down. There were some indications that that pointed for a possible turn to the downside. Fundamentally speaking, it was losing future revenue as they were no longer able to provide a full selection of movies. Netflix failed to renew distribution contracts. Technically speaking there is a head and shoulders pattern with a neckline support breach. The highest peak is the head, and the peaks to the left and right form the shoulders. When it started trading below the support level that was the day to sell.
Picking Your Sell Limit Order Price
The candle shows that the trading range is between $168-$158 about 6% trading range. Remember the goal is to sell at the highest possible price. We must be reasonable when setting a sell limit order price. Especially is situations of panic. The key is to be realistic. The market is crashing, liquidity is drying up in the stock. Large block of shares being sold off causing the price gap in the the chart etc. In this situation you might want to set your limit right in the middle of the trading range. I would set the limit order to $163. Some traders might set the price at $168 and slowly move it down until the order is executed. This may be a hassle depending on your online brokers trading platform.
Use the Intraday Chart to Set Sell Limit Order Price
On the day of selling you can set your chart to 5min candles to spot the trading range. By recognizing chart patters on the intraday chart you determine a reasonable sell limit order price. If the stock is gapping on each pattern, you might have to set your price much lower. The gapping price action is a sign that liquidity is drying up on one side of the market. In this case there may be very little buyers in the market.
Don’t panic! Be patient when setting a Sell Limit Order
Remember that because execution is not guaranteed, it may take time for the order to go through. During times of major sell-offs, the market over reacts. When you set your sell limit order, give it a few minutes before you start to change it. The market price must reach your sell limit price for it to be executed. During a market down turn like this 5 minutes can seem like an eternity. If in 10 minutes your sell limit order is not executed I would start to change the limit price lower until it gets executed.
Mistakes When Picking Sell Limit Order Price
Take a closer look at the Netflix stock chart again. Notice that the prior days close was at $208. The next day it gapped down to $168 and traded as low as $158. Some traders may think that the trading range is $208-$158 and set their sell limit order price higher, closer to $208. This is wrong. Your order will never get executed. The correct trading range to set your sell limit is between $168-$158.
Reason: These technical barriers that prevent the stock from going above $168.
1. The price gap on the chart: The price action represents the lack of buyers in the market. The buy side has completely dried up and now is trading lower zone. It’s very rare, for a gap to get filled and recover on longer term stock charts. In this case we are looking at daily candlestick bars.
2. The Support line is breached: The horizontal black line represents where price has stayed above for some time. It seems to bounce above this area. When price has crossed below, it becomes a resistance level. Hig
3. 50 day / 200 day moving average crossover: This is a very bearish signal. When the green line crosses below the red line. This is an indication that the trend has changed. You should expect lower prices in the future. There is huge momentum on the bearish side.
You can think of these elements as barriers to higher prices. It’s important that when using sell limit orders, you incorporate technical analysis of stock charts. You should always analyze the situation to ensure your order executed. There are many times that traders will put a limit order out, and watch the order sit for hours without getting executed. Things can get stressful when trading markets at it’s most violent stage.