Yesterday’s review of the use of sell stops prompted one reader to post the following question:
When selling an ETF, should any type of limit be placed on the sell order, or just sell at market price? Buy and sell orders are new to me and I’ve just been buying at market price. I have not executed a sell yet, so any advice or links to information that anyone can share would be appreciated.
While this reader seems to be new to investing, he nevertheless brings up a valid point: What type of order should you use when purchasing ETFs?
My view is that you should always use a limit order and never buy at market price if you have that choice (and don’t need to sell at all costs). Here’s how I approach it:
First, I make sure that the ETF under consideration has a large enough average daily volume to accommodate my size order, which maybe a couple of million dollars. I want to be able to buy or sell without too much slippage in price. Depending on your order size, this may or may not be a consideration for you.
In may case, out of some 600 ETFs that I track, I have identified about 80, which have a high enough volume to facilitate my order at anytime. If my previous day closing price has indicated a buy for the next day, based on the current trend and momentum, then I am ready to place my order.
However, I usually watch the market activity for a couple hours or so into the trading day before taking action. Once I am ready to pull the trigger, I check the current price and place a limit order for that price. Even though I want to get onboard, I will not place a market order as it exposes me to, let’s call it, the vagaries of the market place. I may get a partial fill and may have to enter a different limit price, if necessary, to complete my order.
Again, the idea is not engage in any kind of scalping to squeeze out a penny in form of a lower price, but to participate in the developing trend.
As soon as my order is filled, I set up my tracking spreadsheet along with my trailing sell stop points. I update these every day and know where I stand at all times in regards to any Profits/Losses and proximity to my exit points.
Being clear and disciplined about the process eliminates emotional and irrational decision making, which will make your investment life a lot easier than working by seat of your pants.