The scale order is a type of exchange that uses a series of limit orders to buy or sell stock at better and better prices. It acts until the trade is complete, or until the stock stops its favorable course. Investors at online discount trade websites like E-Trade, and TD Ameritrade can use this exchange by simply setting incrementally different limit orders for certain amounts of shares until the designated trade size is complete, and the exchange is ready to act.
Following is some information on the advantages of stock trading with scale orders.
Scale Order in Investing
A scale order is simply a series of limit orders that buys or sells certain portions of a trade until the trade size (desired shares are all traded) is complete, or until the designated security’s course turns. For example, if an investor is interested in taking on 400 shares of a stock, presently trading at $6, as its price becomes lower, he could set a scale order to buy.
He might set a buy limit order at $5.70 for 100 shares, another for 100 shares at $5.60, another at $5.50, and a final buy limit for the last 100 shares of the 400 total at $5.40. If the price drops, as many of these orders as possible will fill (which could be all, none, or anywhere in between).
In a sell, the scale exchange acts the same way, but its limits increase in value, as stock is sold above the market. Suppose that a trader has 400 shares of a stock that is presently trading at $12. He could set a limit order to unload 100 shares at $12.50, another to sell 100 shares at $12.60, another to sell at $12.70, and a final sell limit for the last 100 shares at $12.70. Any or all of these orders will fill if they can, based on the security’s price movement.
Advantages of Stock Trading Scale Orders
The main advantage of the scale order is that it capitalizes on the right price movement. If the stock moves in the way that the investor who uses this valuable investing tool believes that it might, then shares will be bought at lower and lower prices (decreasing the average price spent), or sold for more and more earnings (increasing the average amount netted per share).
This order only acts insofar as possible. It is never possible to completely be sure of a stock’s movement, so the scale order starts at decent prices, and works toward better prices, if possible, as, if an investor could tell how low a stock will sink in contemplating a buy, or how high it will rise in anticipating a sell, a single limit buy at the lowest of the scale values, or a single limit sell at the highest of the scale values for all shares would be better.
But this is not known, so the scale order allows traders to try to capitalize on favorable movement, if a stock’s course decreases when a trader is trying to buy, or increases when the investor is trying to sell shares of stock.
One thing to keep in mind, however, is that there is never any guarantee that a stock’s movement will be as predicted, and the trade may end up completely unfilled, or only partially filled, when only some orders act.