What is a Scale Order?
A scale order is a group of limit orders that have increasing or decreasing prices.
How Does a Scale Order Work?
Let's say John Doe thinks the price of Company XYZ shares.
However, John doesn't know how low the price will go or when it will go down tomorrow. But he wants in on the action, so he gives his a scale order. In the scale order, the broker is instructed to purchase 250 shares of Company XYZ every time the price falls by $1 tomorrow.
So, if Company XYZ at $10 per share, the broker does nothing until Company XYZ trades at $9. At that point, he buys 250 shares for John. As the day goes on and Company XYZ goes to $8, he picks up another 250 shares. This goes on throughout the day until either the full 2,000 shares are purchased or the trading day ends.
Why Does a Scale Order Matter?
Scale orders help investors take advantage of increases or decreases in stock prices. By using scale orders, investors in John's situation can avoid the nail-biting associated with guessing whether the stock go lower and then kicking themselves for not getting the lowest price. Of course, the idea works in reverse, whereby investors can sell in increments so as to capture more of any price increases.