Lesson Overview

5 Types of Contingent Orders

Contingent orders are a great way to place orders in the market if you are not able to watch positions throughout the day. Anyone who is working a full-time job (or frankly doesn't want to sit and watch the market) each day should learn how to master of these 5 contingent orders. These are also a great way to systematize your trading by placing your closing or adjusting orders in advanced predetermined prices. We will often automatically place a GTC closing trade right after our opening trade so that the market gets us out of a trade automatically in the future whenever that price level is hit.

Show Video Transcript +

In this video tutorial, what I'm going to cover are contingent orders. These are really the top five contingent orders that traders like to use in the market.

Actually before I begin this video, what I'm wanting you to do is just quickly add your comment to this post or this video and let me know which one of these you actually use the most.

I'd be really interested to see if you use stop losses versus trading stops or regular contingent orders the most, as a trader. What we're going to do is we're going to go through the five different contingent orders here and at the end of this video you'll have a complete understanding of how they work and how you can use them with your trading.

The first one we're going to take a look at here today is just the regular contingent order. This is one where you have an index or a stock or whatever you want to trade and you place a contingent order to either buy or sell the security.

In this case with the UVW index, let's say that you buy the stock at $100, or the index at $100 dollars. What you're going to do is you're going place a contingent order at .2 to sell whenever you get a 1.2% profit.

What that's going to do is that it's automatically going to trigger a sell signal and you're going to sell out of your index. On the bottom side of this chart, you can see that you have XYZ stock, so let's say that you want to buy the stock at $25.

You're going to place a contingent order to buy the stock whenever it gets down to $25. In this case, you wait a little bit and then it gets down to $25, and in circle four you're going to have an order automatically go into the market that's going to buy that stock at $25.

Now should XYZ stock never trade to $25, your order never gets entered into the market. Now let's talk about multiple contingencies. In this case, this is where you enter an order that has two sets of criteria, or multiple contingencies.

One order is going to trigger or the other order is going to trigger, if that set of criteria gets filled first. In this case, we have XYZ stock again that we bought again at $25 dollars. We're going to automatically place two contingent orders around that initial purchase.

One is going to be to sell the stock at a loss at $20 dollars and so that's in circle 2A. The other is going to be to sell the stock at a profit when it reaches $32 dollars. Now you can notice that we've bracketed the market.

We've taken our profit target and we've also made note of our minimum loss, or where we want to make that loss stop, as a stop loss. These orders are going to be working at the exact same time, so whichever one fills first, that's going to be the order that gets there.

If XYZ stock in this case trades all the way up to $32, the sell order to sell it at $32 goes, but your order for $20 dollars still keeps going, so you have to remember to cancel that one back.

This is a really great way as a trader at home or someone who works on a job, a regular day job to make a trade and have a predetermined risk and predetermined profit targets. Awesome, awesome way to do that.

Now let's get into one that's a little bit more complicated. This is one trigger other, or OTO as they're usually called on your order screen. In this case, one contingent order that gets executed is going to trigger another contingent order to be placed on the market.

Consider it the kind of domino effect that you might have in trading. In this case let's say that we want to buy XYZ stock at $30, okay?

Right now in circle one on the very left-hand side of this chart, you can see that XYZ stock isn't trading at our $30 target yet, so we're going to wait to buy XYZ stock until it hits $30.

That happens at circle number two. Now at the same time that we buy that stock, we already have another order that says that at whatever price it gets bought, we're going to have a, in this case, a $2 trailing stop loss.

What that's going to do is automatically enter an order that's contingent upon the fact that if XYZ stock trades down to $28 dollars, then we're going to sell out at a loss, but if XYZ stock starts trading higher, our order is going to trail the stock dollar for dollar $2 dollars all the way up.

Then we'll automatically stop at any point in which the stock starts to reverse, okay? It's just trailing on the way up, it's not going to trail it on the way down. That's a real key point to remember.

Let's say that from point number two all the way up, the stock trades all the way back up to $35 dollars okay? You can see that from point number three, our trailing stock that was originally at $28 has now trailed the stock all the way up to point number 5.

After it reaches $35 dollars you can see that XYZ stocks starts to sell off. You can see that our level at five never changes, so we actually end up selling this at a gain of about $3 dollars here and we sell it at $33.

You can see how one order, the execution of one contingent order created the other order out of the really thin air and that's really what you want to set up, is these multiple scenario orders that are contingent upon each other.

Now let's take a look at a different example. This is one cancels other, or an OCO. In this case, this is similar to our multiple contingency screens that we looked at two slides back here. In this case, let's say we bought the stock at $23 in circle one.

Now it's traded up to around $25. In circle two it's at $25, and we want again target both our profit and take out and measure our risk or put in a stop loss order. We're going to put in two different orders, but whichever one gets executed first, the other order gets canceled.

You always know that it's either going to be one that gets hit or the other and the other order is going to automatically be cancelled immediately.

In this case we have an order to sell the stock at $27 dollars and that's circle number three. If the stock trades all the way up to $27 dollars, we're going to sell it immediately. In circle number four, that's our stop loss, so we're never going to lose more than $1 dollar from where we are right now.

Again, if it traded all the way down to $24, that would get executed first. In this case, XYZ stock continued to trade up and traded all the way up to point number five, in which case it hit our $27 dollar target.

That's where we actually sold the stock, profited and took the money and put it in our pocket and you can see that our order down below was automatically cancelled. Because the other order was executed, the other order below had been cancelled and removed from the market.

Now let's look at a trailing stop. This is what we looked at again two slides ago where we buy the stock, say at $25 in XYZ and we want to trail the market by a certain percentage, or a certain spread. In this case, we are going to trail it by about $1.

From point number two where the stock is trading at $27, our stop loss order, or trailing stop is going to go in at point number three, which is about $1 below $27. It's going to continue to trail the market dollar for dollar as the market improves.

If the market decreases or XYZ stock starts to sell off, then the trailing stop stops at that level and levels off. Okay, it's not going to go down from there. It can only lock in profits. It cannot increase your loss.

As the market continues to go higher, you can see that around zone number five we had a little bit of downward movement in XYZ stock, but our trailing stop loss order did not move.

As the stock continued up to $29 again, we trailed it by about a dollar all the way up util we eventually sold it at $28 dollars, over in circle number six. Again, you can see how this trailing stop will help lock in profits for you while you're not trading.

You can be totally away from the market and set these trailing stops and it just moves with the market, locks step all the way up locking in profits.

Okay, so those are really the main contingency orders that you need to be aware of as a trader and this is really going to help you both in your options trading and your stock trading obviously.

This is a really great thing to really dive into this week and understand, because the more you can understand about these orders, the easier you can make your life, the less risk you're going to take in the market, right and you're going to be able to start trading more while you're not watching the market.

We all don't want to sit in front of the screen all day and watch all these orders, so if you can learn to set up some of these trailing stops and contingent orders or one cancels other, then you can start to really strategize with your orders and set profit targets and stop-loss targets and be a little bit more of a complete trader.

As always, I hope you guys really enjoy these videos, please add your comments and let me know which one of these contingent orders you use the most. I would love to hear what you guys have to say. Happy trading.

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