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Know Your Orders
Faced with a large, sometimes overwhelming number of markets, many new traders start smart; they focus on learning the basics-the type of market, agricultural, metal, currency, soft, livestock, financial and indices, which exchanges they are traded at, margin requirements and the relative risk associated with these particular markets and contracts. After a while, a trader learns how to find entry and exit points with technical analysis, fundamental analysis or some combination of both techniques. As a new trader's knowledge increases, the confidence to place an order grows. But just when a new trader is about to act on their work and place an order, an equally important bit of homework has often been left undone. It's something far less complicated than market dynamics yet far more critical to a trader's success-how to place an order, what type of an order to use when, how to verify that an order has been placed properly and more importantly what kind of orders do the exchanges accept. These issues are particularly important to the online trader.
What's the difference between a market order and a limit order? When is it a good strategy to place a spread order? How do I protect my position now that I am in a trade? If you don't know, you're not alone. Many new traders, and even some with a bit of experience, don't always know about the different types of orders. Your broker is there to help you decide which type of order is right for the particular tactic or strategy you're looking to employ, but it's still important that you understand the different types of orders too-especially, perhaps even crucially, if you're trading electronically...as you are out in the wilderness by yourself.
Knowing how different orders function is an important part of your trading strategy. It's important to learn the different types of orders available to you in specific markets and even more important to use them appropriately to accomplish your trading strategy. How important is it? Well, consider this: Your research can be right, your instincts can be right, your analysis can be impeccable and your timing can be on the money, but if you place the wrong type of order your potentially winning trade can become a loosing one. With all the work traders do to develop sound trades, it's worth the effort to learn how to place them.
Day Orders: All orders, unless specified otherwise, are considered to be Day orders and are good only for the session they are entered.
Open or Good Till Canceled (GTC) Orders: If the trader wants an order to work beyond the day it's entered, the order is placed as an Open or GTC Order. This type of order will remain working until the order is cancelled. Be wary: more than a few traders have forgotten that they have left Open or GTC orders working. This can lead to errors. Keep a detailed record of all working Open or GTC orders and check them with your broker daily.
Limit Orders: A Limit order is used to ensure that the order will be filled no worse than a specific price. Limit orders can be both buy and sell orders. Buy Limit orders must be placed below the market and Sell Limit orders must be place above the market. On occasion, a Limit order can be filled better than the specified price but never worse than the specified price.
Market Orders: A Market order is used to either buy or sell whatever price the market is at the time an order is executed (as opposed to when the order is placed). In general, Market orders are always filled and allow the trader to initiate or liquidate a position regardless of the price. In some cases, such as when the market is "locked limit," a Market order may not be filled.
Stop Orders: A Stop order is executed only when the market reaches a specific price and when it does the order becomes a market order. Buy Stop orders must be placed above the market and Sell Stop orders must be placed below the market. Generally, a Stop order is used as a defensive means for exiting a market while protecting against adverse moves in the market (see below for another use of a Stop order). Since a Stop order becomes a market order when it's filled, it is almost always filled at a worse price and sometimes at a much worse price. Another use of a Stop order is to enter the market by either buying strength or selling weakness. Once the market has reached a specific price and the trader has determined that at this price level the market has signaled that it will continue in that direction, a Stop order is placed at that price level. Again, Buy Stop orders must be above the market and Sell Stop orders must be below the market. Like a market order, a Stop order may not be filled in some cases, such as when the market is "locked limit."
Stop Limit Orders: A Stop Limit order is similar to a Stop order but the execution price is limited, providing the trader with a specific price level where the order will be filled no worse than the specified price. As with a Stop order, Buy Stop Limit orders must be placed above the market and Sell Stop Limit orders must be placed below the market. Like a market order, a Stop Limit order may not be filled in some cases, such as when the market is "locked limit." Stop Limit orders are not accepted on all exchanges. Check with your broker or trading desk for each exchange.
Stop Close Only Orders: A Stop Close Only order is exactly the same as a Stop order but is only activated if the price level is at or exceeds the must level on the close. Much like stop orders, Buy Stop Close Only orders must be placed above the market whereas Sell Stop Close Only orders must be placed below the market. Like a market order, a Stop Close Only order may not be filled in some cases, such as when the market is "locked limit." Stop Close Only orders are not accepted on all exchanges. Check with your broker or trading desk for each exchange.
Market if Touched Orders (MIT): An MIT order is much the same as a limit order except that once the limit price is struck the order becomes a market order and will be filled at whatever the price of the market is at the time of execution. In the case of an MIT order, it can be filled at the price specified, worse than the price specified or, in some cases, better than the price specified. Generally, a MIT order will be filled at the price specified or worse than the price specified. Like a market order, a MIT order may not be filled in some cases, such as when the market is "locked limit." MIT orders are not accepted on all exchanges. Check with your broker or trading desk for each exchange.
One Cancels the Other Orders (OCO): An OCO order has two parts to it and once one part of the order is filled, the other part of the order is canceled. OCO orders are not accepted on all exchanges. Check with your broker or trading desk for each exchange.
Spread Orders: A Spread order is an order to simultaneously buy and sell one contract against another. This can happen within the same market (such as buying July soybeans and selling November soybeans) or between two different markets (such as buying Corn and selling Wheat).
Whether you are new to trading or have many years experience, understanding the order process is critical to a successful trading career. Do your homework and confer with your broker; he or she, as well as your firm, is a resource to be utilized. If trading online double check your orders to ensure that the order you're placing will function in the way you expect it to. It's worth the extra effort and after a time will become second nature. Placing the wrong order can create havoc on your trades and can also cost you money.
GOOD LUCK AND GOOD TRADING |
