The Simplest Way to Get Out

WHAT COLOR IS YOUR TRADING PARACHUTE? On tradeMonster’s system (http://www.trademonster.com), it’s white on a black background, and encourages you to take advantage of the online broker’s most recently launched tool, Exit Plan.

This enhancement, an icon visible on a portfolio-detail screen, simplifies the creation of conditional orders for getting out of a position. Many online brokers allow you to set up bracket orders when you buy some stock; these orders permit you to define your profit target or set a stop-loss, which automatically sells the stock if its price rises or drops by a certain percentage. You enter these sell orders at the time you buy the stock, which (in theory) gives you some trading discipline.

Exit Plan aims to make this basic risk-management procedure easier by using understandable words and icons to replace opaque jargon such as trailing stops, or alphabet-soup descriptions like OCO (meaning “one cancels other") and OTO ("one triggers other"). To use Exit Plan, click on a position in your portfolio and you’ll see a button with a parachute on it that says, “Set exit plan.” Exit Plan can be used for options positions as well as stocks.

There are three basic steps to defining your plan: Set a time horizon, a profit target and a stop-loss.

The profit target and stop-loss are attached to an on-screen calculator so you can create a target price based on a percentage or total change, or price-per-share change. If you fill in one field, such as percentage change, all the others are calculated for you.

At this point, you can set up either an alert or an order. Click on “Create alerts” to send yourself profit/loss notices via e-mail, which should prompt you to visit your portfolio and make needed adjustments. “Create order” automatically generates an OCO order.

The conditional orders you set up with Exit Plan aren’t visible to the market until the trigger is reached, so your intentions aren’t public knowledge. If, for instance, your profit target is reached, the order capturing your profit is executed, and the stop-loss order is cancelled.

Once your exit plan is in place, it’s displayed when you click on the position in your portfolio. Exit Plan also displays in portfolio view, which is the part of tradeMonster’s Website that lets you keep tabs on your current holdings. Portfolio reports are customizable, so you can set up a column in your portfolio view that displays your profit target and stop-loss.

Exit Plan is available on tradeMonster’s paperTrade, where you use fake money to learn how the system works. One of the features we like about the tradeMonster system is that its paperTrade is identical to its live-trading platform and you can use it without having to open a funded account.

The Chicago Board Options Exchange started to offer tradeMonster’s paperTrade on its Website (cboe.com) in the first half of September as a way to let investors learn more about trading options and other securities without risking any capital.

Exit Plan is a nicely designed tool, even though it isn’t unique. Still, it is a good addition to a platform that has numerous thoughtful touches.

The price points you define in Exit Plan are based on your own thoughts about where the stock might go, and the risk you are willing to take. An alternative that we like provides more support—but only for creating stop-losses.

SmartStops.net (http://www.smartstops.net) calculates price triggers (for stocks and exchange-traded funds only; no help here with options) each day based on current market conditions, historical trends and its own internal exit methodology. SmartStops float beneath the stock’s expected daily price range.

You could take a peek at SmartStops.net’s Website when you’re entering a stock position—you can get five SmartStops per day for free—and use its suggestions for stop-loss prices.

CHECKING ON YOUR BROKER: The Financial Industry Regulatory Authority (FINRA, http://www.finra.org) lets you browse its database of brokerage firms and individual brokers. It’s full of information about a firm or individual’s history as well as disciplinary and regulatory events.

The database, called BrokerCheck, is available at http://www.finra.org/brokercheck; you can also find it on the main Finra page, but that will take some wading through (hint: click on “Investors” and then the banner for “BrokerCheck” toward the top of the page).

The reports that BrokerCheck generates can be full of legalese and capital letters, since they are compiled from forms collected through the securities industry’s registration and licensing process.

When it comes to the online brokers we regularly cover in this column, the section of the report entitled “Arbitration Award” can be very interesting. For instance, when I looked at the arbitration reports for E*Trade, there are about 250 going back to 2000, most of which appear to involve investor losses that customers blamed on the firm. Almost all of these arbitrations ended with the phrase, “Denied in full,” indicating that the arbitrator did not find E*Trade at fault.

Individual details such as names and Social Security numbers aren’t published, but you might find it of assistance to see the complaints lodged against a broker you’re considering using.

UPDATE
: In “The Long and the Short of It” (Sept. 21), we discussed publicly traded online brokers’ policies on permitting customers to short the brokers’ own stock. We asked all the publicly traded online brokers that we cover: “Do you allow your customers to have a short position in your stock?” A representative of E*Trade responded that the firm didn’t permit customers to short its shares.

We received a clarification following publication. What E*Trade doesn’t allow is a short position in any shares priced at less than $3, the range in which E*Trade stock is currently trading.

If the firm’s shares again trade above $3, E*Trade’s customers will be able to short them.

And now that Ameritrade has reversed its previous policy (as we reported in the column), we can say that no online brokers prevent clients from shorting their stock—as long as it is shortable.

Posted by on 10/10 at 03:14 AM

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