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Dan O'Neil |
MAY I TAKE YOUR ORDER?
I'm just getting started trading futures and I'm confused about all
of the different orders available. What are the basic futures order types,
and how do I know which one to use?
Traders have several choices when it comes to placing orders to buy
or sell commodity and financial futures. For example, you can instruct
your broker to buy or sell at a specified price. Or you can direct the
broker to buy or sell on your behalf immediately, wherever the market is
trading right now. You even have control over how long your order will
be active in the marketplace -- you can place an order that is good for
one day or for an extended period.
Understanding how different types of orders work may make a difference
in whether your trade gets executed and at what price, but not every exchange
accepts every order type so it's important to check exchange guidelines
before trading. Here are some common futures order types from which to
choose:
Market order
A market order is the most frequently used order type. It is a good
order to use once you have made a decision about opening or closing a position,
keeping you from having to chase a market trying to get in or out of a
position. The market order is executed at the best possible price obtainable
at the time the order reaches the trading pit.
Limit order
A limit order is an order to buy or sell at a designated price. Limit
orders to buy are placed below the market, while limit orders to sell are
placed above the market. Since the market may never get high enough or
low enough to trigger a limit order, a customer may miss the market if
he uses one. (Even though you may see the market touch a limit price, this
does not guarantee or earn the customer a fill at that price.)
Stop order
Stop orders can be used to:
- To minimize a loss on a long or short position
- To protect a profit on an existing long or short position, or
- To initiate a new long or short position.
A buy-stop order is placed above the market and a sell-stop order is
placed below. Once the stop price is touched, the stop order is said to
have been "elected," will be treated like a market order, and will be filled
at the best possible price.
Stop-limit order
A stop-limit order is used by the trader who doesn't want to be filled
any worse than his stop price. Here, the stop and limit prices specified
on the order are the same. This order becomes a straight limit order if,
once the stop is elected, the broker is unable to execute the order at
the stipulated price or better. In addition, a stop limit order will be
placed as a straight limit order if, when received by the exchange, the
stop price already has been violated.
Stop with limit order
This is preferred by the trader who wishes to give the floor broker
a limit as to how far through the specified stop the order may be filled.
Two prices must be stipulated when the order is placed: the stop price
and the limit price. When the stop is elected, the order will be filled
if it is possible without exceeding the limit price. If this isn't possible,
the order becomes a working limit order. In addition, a stop with limit
order will be placed as a straight limit order if, when received by the
exchange, the stop price already has been violated.
Stop close only (SCO)
The stop price on a stop close will only be triggered if the market
touches the stop during the close of trading. The disadvantage of this
order is that a fast market in the last few minutes of trading may cause
the order to be filled at an undesirable price. It can, however, protect
the customer from getting filled during adverse price fluctuations during
the course of the day.
Market if touched (MIT)
MITs are the opposite of stop orders. Buy MITs are placed below the
market and sell MITs are placed above. A MIT order is usually used to enter
the market or initiate a trade. It is similar to a limit order in that
a specific price is placed on the order. However, a MIT order becomes a
market order once the limit price is touched or passed through. An execution
may be at, above, or below the originally specified price. A MIT order
will not be executed if the market fails to touch the MIT-specified price.
Good till canceled (GTC)
Also known as an open order, this is used in conjunction with a limit
or stop order. The order will remain valid and work until the trader cancels
the order, or it is filled, or the contract expires. GTC orders do not
cancel automatically; they remain working in the marketplace until executed
or until canceled by the trader. If an order is not designated good till
canceled, it is a day order and will expire at the end of the current trading
session unless filled or canceled prior to the close.
Market on close (MOC)
This is an order that will be filled during the final minutes of trading
at whatever price is available. Most floor brokers, however, reserve the
right to refuse MOC orders up to 15 minutes prior to the close depending
on market conditions.
Fill or kill
The fill or kill order is used by customers wishing for an immediate
fill, but at a specific price. The floor broker will bid or offer the order
three times and immediately return either a fill or an unable.
Originally published in the May 2007 issue of Technical Analysis
of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright
2007, Technical Analysis, Inc.
Return to May 2007 Contents
