Stop orders can be used in futures trading as a great way to help manage risk and protect losses, lock in profits, or enter the market on a breakout. The downside to using stop orders, however, is slippage. Slippage is the difference between the price a trader intends to execute a trade, and the price the trade is actually executed. Slippage is primarily caused by a lack of liquidity in a market and often causes trades to be executed at undesired prices.
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
Liquidity is simply a measure of the ease of ability to enter and exit a market at a desired price based on the amount of buyers (bids) and sellers (asks/offers) in that market. In a liquid market, such as the E-Mini S&P, slippage is not as common of an issue as in an illiquid market such as oats. Please view the following examples to have a better understanding of why slippage is more common in oats versus the E-Mini S&P, and how it affects fill prices on stop orders.
Let’s imagine that a trader is looking to enter an order to sell 4 E-Mini S&P at 1875 using a stop order to protect against a long position he currently has in the market. If we look at the following Depth of Market, one can see that there are 407 bids at 1875, so this trader should have no issues getting filled at 1875 if the market reaches that price.
On the other hand, let’s imagine that a trader is looking to enter an order to sell 1 July 14 oats futures contract on a stop at 4.3900 to protect a long position. If the bids and offers listed on the Depth of Market remain the same as shown once the market trades through 4.3900, the trader will be filled at 4.3700. This is because there are no bids at the trader’s desired price of 4.3900, but there is one bid at 4.3700.
As one can see in the above examples, the liquidity or lack of liquidity in a market is a very important factor when placing a stop order in that market. Liquidity is the ability to buy or sell a contract based on the level of trading activity in that market. Therefore, markets with high liquidity are easier to enter and exit at a desired price than markets with low liquidity, since there are more bids and offers at various prices in more liquid markets. For this reason, it is more common to place a stop order in a market with high liquidity because the trader has a higher probability of getting filled at his/her desired price.
Ultimately, stop orders can be used as excellent ways to enter the market on a breakout, or attempt to minimize losses or lock in profits on an existing position. However, it is imperative for trader’s to understand that stop orders are not always promised fills at the price they are executed due to slippage.
Try Insider Market Advisory – for 30 Days
Insider Market Advisory – Trial - This premier futures trade advisory service is designed to provide you with the timely information your trading depends on. Each day, you'll get a concise snapshot, from both technical and fundamental perspectives, of all eight futures market sectors.
How to Make Your First Futures Trade
Are you interested in trading futures but unsure of how to start? With the help of this informative guide, you will receive step-by-step instructions to turn your interest into action!
Risk Disclosure
STOP ORDERS DO NOT NECESSARILY LIMIT YOUR LOSS TO THE STOP PRICE BECAUSE STOP ORDERS, IF THE PRICE IS HIT, BECOME MARKET ORDERS AND, DEPENDING ON MARKET CONDITIONS, THE ACTUAL FILL PRICE CAN BE DIFFERENT FROM THE STOP PRICE. IF A MARKET REACHED ITS DAILY PRICE FLUCTUATION LIMIT, A "LIMIT MOVE", IT MAY BE IMPOSSIBLE TO EXECUTE A STOP LOSS ORDER.
The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.
Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.
© 2021 StoneX Group Inc. All Rights Reserved
