When someone hears the words automated trading, they automatically think of some multibillion dollar institution programming computers to trade for them. That is true, but it is also widely used by the retail trader as well. It is available to you and many have no idea they have this option.
For this piece, I am going to use IWM (ISHARES RUSSELL 2000) to explain how automate your trades. If I was just trading IWM by buying/shorting shares, I would just have to place stops and exits and the trade would be pretty cut and dry.
But if you trade something that tracks IWM, like leveraged ETF’s or options, it gets a little complicated. How does one know where an option will be trading when IWM hits your upside/downside targets? How do you figure out where the leveraged ETF will be trading when IWM hits your targets?
It is very hard because there are many variables that make price different when IWM reaches your price. That is why contingent orders work great. A contingent order is when you place a market order to close your position when the underlying stock/ETF reaches the price you set.
How It Works
My live example: We bought 10 IWM put options when it was trading at 117.15 last week. The two short term targets for IWM were 115.15 and 114, with a stop at 117.15, which was where we entered this trade. Three orders were placed.
1.) Stop at market if IWM trades above 117.15 (That was our stop)
2.) Sell 5 put option contracts if IWM trades below 115.16 or our target 1 (if filled you have to remove 5 contracts from the step 1-as you only have 5 left)
3.) Sell 5 put option contracts if IWM trades below 114.01 which was our target 2
By placing our orders like this, traders do not have to watch their computer screen at all times. The orders are already in place and you just wait and see what is hot first.
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To watch a free video showing you how to place contingent orders, click here.
