Stocktake: Traders need to be careful in volatile markets
Safer to use limit and stop-loss limit orders, which help you control worst-case price
Order types aside, it’s also obvious that traders need to take smaller positions right now. Photograph: iStock
The recent volatility is a godsend for traders who like to nip in and out of stocks, but huge market movements bring danger as well as opportunity, which raises the question: how should traders handle markets right now? Exchange-traded funds (ETF) provider Wisdom Tree last week cautioned against using market orders in a fast-moving market. Market orders are filled at the best available price. They get you in and out fast, but not at a specified price; if prices are moving quickly, you might end up buying or selling for a very different price than you intended.
Similarly, traders use stop-loss orders to minimise potential losses, but such orders can become market orders once triggered, meaning the trade could be executed at a price that is way below your intended selling price.
Accordingly, it’s generally safer to use limit and stop-loss limit orders, which help you control your worst-case price. Of course, there is also potential downside here, as your order may not be filled and you might end up chasing the market. Order types aside, it’s also obvious that traders need to take smaller positions right now. Markets are seeing more movement in a day than you would ordinarily see in a quarter; if you bet too big and get it wrong, then you may not live to fight another day.