How to Place Orders
No matter how much
analysis you do or
how sophisticated
your software is,
virtually nothing in
trading is more
critical than
entering your orders
properly. It is hard
enough to determine
the trades you want
to take.
Communicating your
trading decision to
the market can be
another challenge if
you are a trading
newcomer – unless
you work with a
broker or
experienced trader
who can explain the
terminology, the
strategies and the
nuances of the
various orders.
Remember, it’s your
money the broker is
holding so you
should be very
careful about
telling the market
what you want to do
with your money.
Before discussing
the various types of
orders, here are a
couple of important
points:
-
Not all orders
are accepted at
all exchanges or
by all brokerage
firm trading
platforms. Check
with your broker
to be sure which
orders you can
use for the
markets you
trade.
-
Entering a trade
is not the end
of the order
process. Be sure
that you get a
confirmation
that your order
has been
executed and the
price at which
the order was
filled. That
fill shows where
you stand in the
market and may
be the key to
followup orders
such as stops.
-
Never assume
that a broker or
a computer knows
what your
position is or
what you are
trying to
accomplish. If
you say or click
“sell” instead
of “buy,” your
order is likely
to get executed,
and you may wind
up doubling the
size of a short
position when
you thought you
were closing out
the short
position.
-
Keep your own
order log,
especially open
orders because
they may lie in
some forgotten
queue long after
the market has
moved away from
the area where
they were placed
and give you a
big surprise if
they are filled.
Types of Orders
Below are some of
the most common
types of orders and
where you might use
them, either to
enter or exit a
position. To
understand the
consequences of an
order more fully,
you may want to work
with a broker, at
least initially,
until placing orders
becomes second
nature to you.
Market Order
A market order is
the most common type
of order and should
be used whenever you
want your order to
be executed
immediately. You do
not have to indicate
a specific price
because the order
will be executed as
soon as possible at
whatever the next
available market
price is. Once this
order is placed, it
cannot be canceled
because it is filled
immediately.
Keep in mind that
the next available
price may be far
removed from the
price at the time
you placed your
order in wild market
conditions. This is
known as “slippage”
and can be one of
the most costly
aspects of trading,
especially in “thin”
markets that may
have large price
jumps. Do not use
“at the market”
orders in thin
markets or in
volatile conditions
unless it is
imperative that you
get into or out of a
position at whatever
price you can get.
Although those
situations do exist
sometimes, the
market may take
advantage of you if
you resort to the
market order.
Market on Close (MOC),
Market on Open (MOO)
Some traders
call this order
“murder on close” or
“murder on open”
because those
typically are the
periods of the
regular floor
trading session when
the markets are most
active and the odds
are higher for the
execution price to
be away from the
posted current
price. These are
just market orders
that must be filled
within the price
range during the
official designated
closing or opening
time periods. The
MOC order may be
very useful to close
out a day-trading
position that you do
not want to hold
overnight, but keep
in mind that it does
have its risks.
Limit
A limit order
specifies a price
limit at which the
order must be
executed – you get
the price you want
or better or you
don’t get a
position. A limit
order lets you know
the worst price at
which your order
will be executed.
However, you cannot
be certain that a
limit order will be
filled because the
market may not trade
at your price, or
there may be only a
few trades at the
limit price level
you specified and
yours is not one of
the orders filled.
With a limit order,
the tradeoff for
being sure about the
worst price you can
get is that you may
not get a position
at all.
A buy limit order is
placed at a price
lower than the
current market
price. A sell limit
order is placed at a
price higher than
the current market
price. Some traders
add “or better” to a
limit order to
reinforce their
intent, but that is
implied in a limit
order and is not
necessary.
Market If Touched
(MIT)
A market-if-touched
order combines some
features of both the
market order and the
limit order. Like
the limit order, a
MIT order may be
executed only if the
market reaches a
particular price.
Unlike a limit
order, when that
price is reached,
the MIT order
becomes a market
order, executed at
the next possible
price available.
That means a MIT
order could be
executed at the MIT
price, at a lower
price or at a higher
price.
An MIT buy order
becomes a market
order if and when
the market trades at
or below the order
price. The MIT order
does not guarantee
that you will buy at
the limit price or
lower. On the other
hand, if the market
bounces back above
the MIT price, it
does get you into a
long position
whereas a limit
order would not.
An MIT sell order
becomes a market
order if and when
the market trades at
or above the order
price. The MIT order
does not guarantee
that you will sell
at the limit price
or higher. If the
market falls back
below the MIT price,
it does get you into
a short position
whereas a limit
order would not.
The advantage of the
MIT order is that
you know your order
will be filled if
the MIT price is
hit. The
disadvantage is that
you do not know the
worst price at which
the MIT order might
be executed because
it is subject to the
same market
gyrations as the
market order once
the MIT price has
been reached.
Stop
A “stop” is another
common order because
traders are always
being admonished to
trade with stops to
protect their
accounts. The stop
is often used as a
protective order,
but it is also a
good way to get into
a new position. A
stop order is
essentially a market
order but only if
and when the market
reaches a specific
price. The specified
price acts as the
trigger that
converts the stop
order to a market
order. Until and
unless that trigger
is pulled, your
market order stays
on the shelf waiting
to be activated.
A buy stop order is
placed at a price
higher than the
current market
price. It will
become a market
order to buy only
when the market
moves up to that
price. Like any
market order, the
trade may be
executed at the stop
order price, at a
lower price or at a
higher price,
depending on the
next best possible
price available.
A
sell stop order is
placed at a price
lower than the
current market
price. It will
become a market
order to sell only
when the market
moves down to that
price. Like any
market order, the
trade may be
executed at the stop
order price, at a
lower price or at a
higher price,
depending on the
next best possible
price available.
Source:
VantagePoint
Intermarket Analysis
Software
The chart above will
help to illustrate
the difference
between a limit and
a stop order, the
most common orders
after the market
order. You could
have taken a long
position one of two
ways:
-
A buy stop order
at the blue line
would have
become a market
order once your
stop price was
hit. Note that
there was some
slippage as the
market gapped
above your stop
order, but it
did get you into
position for the
uptrend.
-
A buy limit
order at the red
line would have
gotten you into
a long position
at that price or
lower. If you
did not expect
prices to dip
too far below
the earlier lows
indicated by the
red line
support, a buy
limit order
placed at that
level was a good
choice. If
prices had
barely touched
the red line,
however, the
danger is that
your limit order
might not have
been filled at
all, and you
might have
missed the start
of the uptrend.
On the other hand, a
sell limit order at
the blue line would
have gotten you into
a short position at
that price or higher
– in this case, much
to your chagrin if
that is the type of
order you chose. A
sell stop order at
the red line would
have become a market
order when that
price was hit, and
you would have been
short at the next
possible price,
which might have
been at, above or
below the red line
stop price – again,
not a good thing in
this case as the
market turned around
right after you got
into a short
position and moved
sharply higher. Of
course, you probably
would have adjusted
your orders to
offset that position
before losses
mounted too high.
Stop Close Only
Like a market on
close order, this
variation of a stop
order limits the
time of execution to
the closing trading
range. If the stop
is hit prior to that
that time, the order
is not executed. If
the market is
trading higher than
the buy stop price
or lower than the
sell stop price
during the closing
range, the order
becomes a market
order and is filled
at the best possible
price.
Stop Limit Order
If the stop order
sometimes serves as
a protective order,
then the stop limit
order acts as sort
of a protective
order for the stop.
Because stop orders
become market orders
when the specified
stop price is hit,
the order can be
filled at almost any
price. When a
surprise news event
hits the market, for
example, prices can
make a huge jump. Or
when the market
approaches a
critical chart point
that suggests a
breakout, numerous
stop orders may be
sitting above or
below that point and
may create temporary
erratic price
movements if the
stop is hit.
You may be one of
those with a sitting
order waiting for
the breakout, too,
but you are not
willing to pay any
price to get
onboard. A stop
limit order acts
like a stop order in
every way except for
one provision: You
will not accept a
price that is worse
than the limit
stated. Like any
limit order, the
risk is that you
never get onboard a
runaway market that
never looks back.
Cancel, Cancel
Former Order,
Cancel/Replace
All of these orders
cancel previous
orders, provided, of
course, that you
enter them before
the original order
has been executed.
Several notes about
cancel orders:
-
You cannot
cancel a market
order; it should
already have
been executed.
-
Many electronic
markets do not
allow “good ‘til
cancel” orders.
You have to
enter a new
order such as a
stop every day.
-
In some markets
any “open” or
“good ’til
cancel” order
remains active
until it is
filled, you
cancel it, or
the contract
expires; it does
not go away
because you may
have forgotten
about it or
because you may
have thought you
were offsetting
it with a
different order
later.
-
If there is any
question as to
whether an order
has been
canceled,
contact your
broker
immediately; if
a cancel order
is too late, you
may wind up with
two positions
instead of one
or you may be
holding a
position you
never expected.
One Cancels Other
(OCO)
A
one-order-cancels-the-other-order
is a two-sided order
that is sometimes
used to bracket a
price range when you
are unsure about the
price direction and
want to go with the
breakout either way.
You could place two
separate orders in
this situation, but
the problem is that
both might be filled
in a swinging
market. You could be
locked into a quick
loss or wind up with
a larger position
than you wanted or
just become totally
confused.
For
example, you may
have decided that
you want to be short
a market so you
enter an OCO order –
one limit order
above the current
price to sell in
case prices go up
and one stop order
below the current
price to sell in
case prices slide
through some point.
You only want one
position, but you
want to be prepared
for either
eventuality. Your
OCO order tells the
broker to fill one
order, not both of
them, to get you
short whichever way
prices move.
