LENGTH: 30 minutes
LEVEL: Intermediate to Advanced
Students will learn how to manage risk by using stop and limit orders. They will also learn the relative advantages and disadvantages of each.
Your assignment will be to use stop and limit orders to both mitigate the risk of your open positions or capitalize on market opportunities.
To begin, create a portfolio with 6 stock positions (How to create a new portfolio here). Distribute your allocation equally among the 6 stocks. You can have long or short positions and you will be holding those positions (unless your orders are triggered) for x weeks.
After you’ve established your positions, set both a stop or a limit order for each one.
For example, if you are short MSFT at 115, you could use a buy limit order at 100 so that you make a profit of at least 5 per share if the stock declines. You could also use a buy stop order at 118, so that if the stock’s price rises, and the stock hits 118, you buy shares at the next available price.
Another example is if you are long AAPL at 100, you can place a sell limit order at 110 so that if AAPL starts to rise, you can sell your shares at a minimum profit of 10 per share. You could also use a sell stop order at 90 so that if the stock declines and hits 90, you sell your shares at the next available price.
After X weeks, check on your positions. Write a short reflection on the exercise.
Your reflection should also answer the following questions:
- Were any of the orders triggered?
- Were the orders useful in providing adequate protection? To what extent?
- What would your portfolio look like if you hadn’t placed the stop or limit orders? Did any of them result in an unexpected outcome?
- What were the relative advantages and disadvantages of each type of order? Which one was more useful to you?
- Portfolio holdings page
- Activity record with order status
- Exercise reflection
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