In the realm of active futures trading, having the ability to enter and exit the market efficiently is of utmost importance. The concept of executing different trading order types may seem elementary to market newbies. For the veteran trader, order functionality is a critical part of sustaining profitability.
Three primary trading order types service the needs of 99% of all futures participants:
- Limit: A limit order is filled at a predetermined price or better.
- Stop: Protective stop orders rest behind price at market and check risk exposure.
- Market: A market order is filled immediately at the best price available.
The beauty of these three order types is their versatility. Limit and market orders provide an array of trading options when used in isolation or in conjunction with stop order functionality.
When Precision Matters: The Ins and Outs of Limit Orders
A limit order is a specific kind of order traders use to enter and exit the market with absolute precision. If you must execute a trade at an exact price, then the limit order is your weapon of choice.
By definition, limit orders are instructions given to a broker (manually or via software platform) that direct the buying or selling of a security at a specific price or better. They rest at market or exchange until price reaches the defined level and the order is executed.
Given the speed and volatility of many futures products, limits are well-suited for use within the context of a structured trading plan. Upon a limit order being filled at market, a new position goes live and must be managed. Limit orders are frequently used for active trade management in the following ways:
- Profit targets: Limit orders commonly function as profit targets. They are located above long positions and below shorts.
- Stop losses: A standard limit order is not able to function as a stop loss. Remember, limit orders are filled at a predetermined price or better — if below an active long or beneath an active short, they are automatically filled. To be used as stop losses, limit orders are combined with stops. A stop-limit order brings limit order precision to stop order functionality.
While limit orders are ideal for profit targets, there are better trading order types for stop losses. Typically, when a stop loss is triggered, things are not going well for the open position. Due to the order being filled at a specific price, it’s possible for a stop-limit to be skipped. In most cases, the potential for an unfilled stop order is an unacceptable risk.
When Speed Rules: Executing Market Orders
The market order may be the oldest way of entering or exiting an active futures position. In the days of the open-outcry auction system, a market order was executed through a simple verbal cue or hand signal. In the contemporary marketplace, the click of a mouse has replaced any need for these traditional methods.
A market order is a prompt to buy or sell a security immediately at the best price available. They may be relayed to brokers manually or automatically via a software trading platform. The market order’s primary advantage is speed — when the order is placed, it is executed instantaneously at the exchange.
However, market orders have one major drawback — slippage. Due to the fact that they are filled at the best price available, order execution is a product of current trading conditions. In markets that are rapidly moving or trade with low liquidity, the market order’s final filled price may vary greatly.
In a similar vein as stop-limit orders, market orders may be used to set profit targets and stop losses. A stop-market order combines the functionality of stop and market orders. Also known as market-if-touched (MIT), the stop-market order can be used as a profit target, stop loss, or for opening a new position.
Using Trading Order Types to Secure an Edge
Limit orders? Stop and market orders? Stop-limit and stop-market orders? For anyone new to futures, these terms are often puzzling. Nonetheless, the utility that each of these trading order types offers can be priceless.
For more information on how to put unique order types to work for you, schedule a free consultation with the futures professionals at Daniels Trading.