The Pains of Limit Orders

Limit orders are one of the best ways to prevent slippage when creating or adding to a position in the market. However the drawback to limit orders is that sometimes, if your order is outside the bid/ask price, you may never get the fill you were hoping for.

Today was a perfect example for us and our subscribers. While there was no better way than to play this particular trade as we did, it was frustrating that on QID we had an order in for 58.29 and the stock opened up at 58.48 and never looked back. In fact our target price was 65.85 and we would have hit our target price and gotten right out with a nice 12% gain. But that is the nature of the beast. If you want exact fills then you use limit orders and ultimately using limit orders is the best way to go in most trading situations.

Now you may ask, “So why did you use the limit order?” For one, we just came off of the +900 point rally and knowing that there would likely be some follow through at least heading into the open, we wanted our order to take advantage of as much of the early morning rally as possible and once the gap was filled from the large gap down on 10/3/08 we would initiate our position in QID. Well 19 cents made the difference between being on the sidelines and reaping the benefit in QID. Oh well – you learn and move on!

However, we are not one bit upset about our strategy. Re-evaluating our approach, it was sound and made sense. The tough part about it though is trying to find an entry price on an ultra ETF based on the moves of a market index. Our entry price on QID was based on an expected price move in the Nasdaq and though the ultra ETFs are suppose to trade in a 2:1 manner against/with the index they are pegged to, they don’t always do so. As a result you get what happened to us today by missing our entry price by 19 cents.

We got another ETF ultrashort that we are going to be putting out there tomorrow morning, but you better subscribe if you want a piece of the action.