Futures: Types of Orders and how to
place them properly
When placing an order with a broker, it
is very important to make sure you are placing your order properly. Correct
placement of an order saves time and assures that your are doing what you are
intending to do. Most brokers will repeat the orders back to their clients to
make sure that's what they want to do. If you use a full service broker, they
will gladly help you with your orders. But if you choose the discount service,
you should have a firm understanding of the different order types and be
comfortable with their use. Proper order placement can help you get the fastest
and best possible fill. It is in the proper placement of an order that will help
you get your order to the pit as soon as possible.
It is very important for you to
remember that all orders are considered day orders and will expire
the day you place it unless you specify that you want the order to be working
until you cancel it, called a GTC (Good till Canceled) order. Here
is a listing of some of the most common order types. After a brief description
of the order, an example will follow as to how you would use that particular
order. Keep in mind that the orders are used in the same way if you go Long a
market or Short a market. You would just tailor the order to suit your current
position.
Market Order – The most
common order. This order is used when you want to get the order executed
immediately at the "market price". This order is used to enter a new position or
to exit an existing position.
Example: My account # is 12345 and I
want to Buy 1 May Corn at the market. (This would enable you to go ‘Long’ at the
market. You could obviously use this order to Sell 1 May Corn at the market also
and go ‘Short’)
Market on Open (MOO)
- As the name implies, this order will be executed on the market open within
the opening range. This trade is used to enter a new trade, or exit an open
trade.
Example: My account # is 12345 and I
want to Buy (or sell) 1 May Corn at the Market on Open.
Market on Close (MOC)
- As the name implies, this order will be executed on
the market close. The fill price will be within the closing range which may in
some markets be substantially different from the settlement price. This trade is
used to enter a new trade, or exit an open trade.
Example: My account # is 12345 and I
want to Buy (or sell) 1 May Corn at the Market on Close.
Limit Order - This order is
placed when you are looking to enter a new position, or to exit an open position
at a specific price or better. For example, if you want to buy 1 May Corn
and the current price is 275 per bushel, and you are not willing to buy it any
higher than 275 per bushel, (which may happen if you use a market order because
while the order is being placed the market could trade higher by the time your
order gets to the pit) you would place the order to Buy 1 May Corn at 275 Limit.
This tells the brokers in the pit that you are looking to purchase the Corn at
no higher than 275. With a limit Order, you are only guaranteed to be executed
if the market trades through the Limit price. If the low of the day is 275 per
bushel, it is possible you will not be executed at that price.
If you are in a position and are
looking to exit a trade at a particular price you could also use a limit order.
For example, if you are long May Corn at 275 per bushel and want to take profit
at 290 per bushel, you would place your order to Sell 1 May Corn at 290 Limit.
If you are short 1 May Corn at 275 and want to take your profit when it drops to
265 per bushel, you would place the order to Buy 1 May Corn at 265 Limit. Once
again, if the market just touches your Limit price and doesn’t penetrate it, you
are not guaranteed a fill and should not be surprised when your broker advises
you that you were not filled. Keep in mind that any order that you decide to
place is taken as a day order (The order is canceled at the close of the market
on the day you placed the order) unless you specify that you want the order to
be working until you cancel it called a GTC (Good till Canceled)
order.
Stop Order
- This order becomes a ‘market order’ only when the specified price level is
reached. This order is used to either enter a new trade or to exit an open
trade. The Stop Order does not guarantee that you are going to get in at that
exact price, because as stated, when the price is reached or penetrated, the
order becomes a market order. A buy stop is placed above the market and a sell
stop is placed below the market. Stop orders are commonly used to enter a market
when the market is moving in that direction, protect profits, or to attempt to
limit losses. (Keep in mind, while trying to limit losses, a stop loss order may
not limit your loss to the amount intended) A stop order is considered a day
order unless you specify that you want the order to be a GTC order (Good till
Canceled)
Examples:
- 1. Entering a new position
- You call your broker and ask him where May Corn is trading. Your broker
tells you it is at 275 per bushel. You are interested in buying a contract,
but you don’t want to buy it until the market shows you some strength by
getting up to 285. This would require you to place your order to Buy 1 May
Corn at 285 ‘on a Stop’. This order tells the people in the pit that you are
only interested in Buying 1 May Corn if and only if the market goes up to that
price and not before. When the market trades at 285, the order becomes a
market order and you will get the next best price. If the market is trading at
284 ½ and the next trade is at 286 ¼, you may be filled at or around 286 ¼ not
the 285 that you had as an order. Remember, on a stop order, you are filled at
the market once it has traded at or through the specified price.
- 2. To Protect Profits - You
call your broker because you are ‘Long’ 1 contract of May Corn at 250 per
bushel. Your broker tells you that the current price is 285 per bushel. You
are obviously excited at your $1,750.00 profit (this profit is unrealized
because you haven’t sold it yet) and want to protect some of it in the event
that the market reverses and you lose all of your hard-earned money. You
decide to place a Stop Order at 270 per bushel. By doing so, you would tell
your broker that you want to Sell 1 May Corn at 270 Stop. This means that if
the market started reversing and got to 270, your stop loss would become a
market order and you would be out at or near the 270 price. Therefore, you
have locked in a profit of roughly 20 cents or $1,000.00 and can chalk that up
as a good trade.
(The above is an example and does not take into effect the obvious cost of
commissions and fees. You should plan on deducting these costs, which range
from $40. to $100., from your profit to get the net profit.)
- 3. Attempting to Limit Losses
- You call your broker
because you are ‘Long ‘ 1 contract of May Corn at 250 per bushel. Your broker
tells you that the current price is 245 per bushel. You are not happy because
you realize you are down 5 cents or $250 on the trade. You are not willing to
risk more than $500 dollars on the trade so you decide to place a Stop Loss
Order with your broker. You advise him to Sell 1 May Corn at 240 Stop. Again,
this does not guarantee you can’t lose more than $500 because as stated
before, when the market trades at or through 240 per bushel, the stop loss
order becomes a market order and you are filled at the best price the floor
broker can get for you. That may be 240, but don’t be disappointed if your
broker gives you 239 ½ or worse.
Market If Touched (MIT)
- This
order is similar to a stop order in that it is executed only if the price
reaches a specified level. Like a stop order, when the market trades at or
through the price, your order becomes a market order. The difference between the
stop order and an MIT order is that an MIT order to sell is placed above the
current market price, and an MIT order to buy is placed below the current market
price. *Not all exchanges accept MIT orders. Please consult with your Orion
Futures Group, Inc. broker before placing this type of order.
Good Till Canceled (GTC) - These
orders are also known as ‘open orders’. This type of order is always working on
the floor of the exchange unless it is executed, canceled by the client, or
replaced by another order. When you place an order with a broker, it is assumed
a day order and will expire at the close of that markets trading day. If you
wish to have an order working beyond the day you place it, you must specify GTC.
Fill Or Kill (FOK) - This order
is a limit order that is sent to the pit to be executed immediately and if not
filled it is canceled.
Next ==>>
Knowing when to buy or sell
Fear is one thing.
To let fear grab you by the tail
and swing you around is another.
-- Katherine Paterson
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