There are various tools designed to help you take control of your trading activities and make the most of price fluctuations on the stock market.

We will examine a total of five trading tools, which essentially allow you to leave instructions on your account to buy or sell shares when, or if, a share's price rises or falls to your pre-determined level.

These trading tools will help you to maximise your profits and protect against any losses - without having to constantly monitor the markets and individual stock movements.

But before examining these trading tools, we are first going to have a quick look at trading behaviour, trading bands, support and resistance levels in order to put these instruments into context.

Trading bands: A brief outline

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Share prices do not rise or fall continuously, in one smooth, unbroken line. Instead, they tend to oscillate within narrow trading 'bands', or 'ranges', for a period of days, weeks or months before 'breaking out' and moving up or down to settle within another band.

The band's upper limit is commonly known as the resistance level - a nominal price at which sellers become more active than buyers and increased sales will typically cause the price to fall back.

Conversely, the band's lower limit is known as the support level - the point at which buyers outnumber sellers, demand outstrips supply and the price rebounds upwards.

For the last 9 months of our chart, XYZ plc shares were trading within a 120-150p band.

Why do shares trade within these bands?

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The main reason for the formation of these trading bands relates to trading volumes and trading behaviour. For example:

XYZ plc first floated at 120p in late June last year and there was a heavy volume of trading in the first couple of days. This means that there are a lot of investors holding shares bought at the 120p level.
After a sharp rise, there was a lot of trading activity around the 150p level - just prior to an abrupt downward correction. This means that there is a second large group of traders holding stock bought at the 150p level.
Trading was then light over the next few months. The '120' group refused to take a loss and would not sell below 120p - establishing support at this level - whilst the '150' group were desperate to recoup their money and actively sold stock whenever the price hit the 150p level - providing the upper resistance level.

Trading bands will typically develop over a period of time - months rather than days - and the longer the range takes to establish itself, the stronger are the barriers at both the upper and lower levels.

'Breaking out' or 'breaking through'

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But trading bands aren't forever - if they were, the markets would still be trading at the same level as 50 years ago!

Periodically, rather than 'testing' the resistance and support levels, a price may be sufficiently shaken by good or bad news to 'break out' of the trading band.

This may happen when, for example, the news is so good that there is sufficient demand from buyers to soak up all the disenchanted 150p sales and still give enough momentum for further buying.

Once a support or resistance level is broken, a price will often soar (or plummet) before settling into a new trading band.

Typically, the recently breached resistance level will form the new support level or vice versa.

In this example, the new support level has been created by the heavy volumes traded at the 'breakout' - with many investors having bought into the stock at 150p.

Technical analysis

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IMany technical analysts use support and resistance levels as key measures for their trading decisions. By charting these bands alongside some measure of trading volume or market strength it is possible to make an informed judgment on whether a stock will break through or just fall back into the trading range again.

This leads to a couple of trading strategies:

Range trading. Once a stock has established a trading band, the 'range trader' will monitor trading volumes to check for possible break-outs - and then simply buy at the support level and sell at the resistance level.
Breakout trading. 'Breakout traders' will look for stocks within an established trading band, identify the key levels of support, resistance and trading volumes - and aim to profit when the stock surges on a break-out.

And this is where the tools come into play!

Making the most of price fluctuations: Tools

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The following 5 trading tools have been designed to help you maximise your profits and protect against losses - without having to constantly monitor what's happening in the markets.

Limit Orders. Allow you to set the price at which you want to buy or sell a share - in order to monitor price fluctuations.

Assuming XYZ plc is oscillating within the 120-150p band, you might wish to set a limit order to sell your shares when the price next hits 150p. Your broker will automatically execute your trade as soon as the share price rises to that level. Conversely, decide upon the price at which you want to buy - and your broker will make the trade as soon as the price drops to that level.

Stop Loss Orders. Protect you against losing money in the event of a sharp drop in a share's price.

Again using the same example, XYZ plc is trading just above the 120p support level. If the share price should break through the 120p level you may be fearful of a subsequent sharp drop in the price. So you set a stop loss order to sell your shares if the price falls to 115p - to protect against further dramatic falls.

Target Setting. Allows you to set 2 prices simultaneously - a high price at which to sell if the price should rise and a low price at which to sell should the price tumble. Target setting lets you automatically take a profit if the price rises - but limits your losses if the price should fall.

Range Trading. Lets you buy low and sell high on an ongoing basis as a share price fluctuates within a trading band

The fictional XYZ plc is trading within a 120-150p band. Range trading allows you to leave one limit instruction to buy at 120p and another to sell if the stock should subsequently rise to 150p. Your broker will automatically buy and sell as soon as these levels are hit on an ongoing basis until the order expires.

Price Locking. A trailing stop loss order. It automatically updates your stop loss at the end of each day - 'trailing' any upward price movements, but never moving back down. In effect, this allows you to lock in your profits from any price rises, but continues to protect you against significant falls.

You are expecting XYZ plc to break through the resistance level but are not sure what it is going to do over the next few days. Instead of using a fixed stop-loss, you opt for a 'Price Locking' stop loss that will follow the share price upwards. For example:

XYZ plc is trading at 130p on Monday and you set the 'price lock' at 115p.
By Tuesday night the price has jumped to 140p, so the 'price lock' automatically updates and resets to 125p - still 15p below the current price.
Wednesday night - the price moves up to 160p - trailed by the 145p lock.
During Thursday the price crashes back to 130p, but you are protected by the stop loss and your broker automatically sells your stock at 145p - locking in your profits.

And for these trading tools you may have the option of setting time limits (of, say, 30, 60, or 90 days) - or an exact date in the future, all depending on what your broker offers. Remember though, that whilst these mechanisms help control risk, they don't eliminate it altogether. Trading bands will continue to make their presence felt.

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