PitNews.com | Futures Education - Different Order Types

Different Order Types by Lan H. Turner Company: Gecko Software Phone: 800-862-7193 E-Mail: lhturner@geckosoftware.com Website: www.GeckoSoftware.com

Indroduction At the core of all risk management and trading is using the appropriate order for your market objective. The following are some basic definitions of the common order types, all of which can be replicated in Gecko Software's Track 'n Trade charting software. The Market Order The market order is the most common type of order. With a market order the customer states the number of contracts of a particular delivery month of a specific commodity he/she wishes to buy or sell. The price of the order is not specified, as the market order is filled "at the market" or at the current price when the order enters the trading pit. Market orders are placed when the speculator or hedger wants in or out of the market fast, since time is the most important factor in this type of order, not price. Market on Close is a common variation of this type of order, and is used when the trader wishes to have his/her order executed during the closing of the market (closing range). The Market on Open is another common variation, instructing the order to be filled during the markets opening price range. The Limit "Or Better" Order The limit order specifies a price limit at which the order can be filled. The limit order can only be filled at the specified price "or better". For example, a customer wishing to buy two July Corn contracts at 210 when July Corn is trading at 211 would place the following order: "Buy two July Corn at 210, limit." Buy limit orders must be placed at the current market price or lower; this is because when buying you want the lowest price. The lower the price the better, and limit orders can only be filled at the specified price or lower. Hence one can only place a limit buy order at the current price or lower. A customer wishing to sell two July Corn contracts at 215 when July Corn is trading at 211 would place the following order: "Sell two July Corn at 215, limit." Sell limit orders must be placed at the current market price or higher; this is because when selling you want the highest price possible. The higher the price the better, and sell limit orders can only be filled at the specified price or higher. Note: It is important to know that limit orders is when a buy limit is placed above the market it can turn into a market order, and get filled immediately. This is because if the current price is below the limit price, the market is in a better situation and it becomes a market order. The same principle applies to sell limits: when a sell limit is placed below the market, it becomes a market order, as the higher market price is better. Remember: Gecko Software's Track 'n Trade Program helps you learn all these rules by allowing you to simulate placing these orders, allowing you to practice, and make sure you have each order under your belt, before ever moving on to trade the live markets. Stop Order A stop order is not executed until the market reaches the specified price level. Once the stop level is hit, the stop order becomes a market order. Buy stops are always placed above the market, while sell stops are placed below the market. For example, a customer wishing to buy July Soybeans at 485 when the current market price is 475 would place a stop order as follows: "Buy one July Soybean at 485, stop." If the Soybean market trades as high as 485 or is bid at 485, the order would become a market order and would be filled as quickly as possible. A customer wishing to sell July Soybeans at 465 when the market is currently priced at 475 would place a stop order as follows: "Sell one July Soybean at 465, stop." If the Soybean market traded as low as 465 or was offered at 465, the order would become a market order and would be filled as quickly as possible. Stop orders are usually used to liquidate earlier transactions, to cut losses, or protect profits. For example, let's assume that a speculator bought three July Corn at 210 and the market is currently trading at 225. He/she may wish to protect some of his/her 15-cent profit per contract ($2,250.00 profit before commissions and fees) by placing a sell stop at 220, to protect 10 cents ($1,500 of the profit before commissions and fees). Placing the following order would do this: "Sell three July Corn at 220, stop." There are many other different types of orders, such as stop limits and market if touched orders, but the above orders are the most commonly used and are really the only orders a beginning trader needs to learn. It should be noted that not all exchanges accept all types of orders & furthermore, individual floor brokers may not accept all types of orders. The types of orders that are accepted are subject to change without notice. Keep in touch with your broker on these changes. The Trading Log • Consider keeping a trading log. A trading log can assist you in many ways during your paper trading and your real trading. For one thing, it helps you keep track of your outstanding orders. It is not uncommon for traders to exit markets but leave profit taking orders or stop/loss orders unchecked. • You are ultimately responsible for all orders placed so manage them with a high attention for detail. A log can consist of the date the order was placed, what type of order, buy or sell, quantity, name, price the order was placed, strike price, date you entered the market, price you entered the market, price you exited the market, and profit/loss totals. • You may also wish to add an additional 'notes' section that helps keep you on track with your trades. You can make notes when an indicator is showing a breakout may not be confirmed, or make comments reflecting a change in your trailing stop when a specific price is reached. A trading log can be a very powerful tool for monitoring the accuracy of your orders. In addition, it can help you keep your trading plan in check. The Process Know where the market is trading. Often times, traders will place orders that are through already "through their price". In addition, if you are placing orders after market hours, be aware that the market can open anywhere within the daily trading limits (if trading limits exist in that market) • State your name & account number • Specify a buy or sell • State the quantity • Specify the market • Specify the month and if applicable the strike price if it is an option order. • Specify what kind of order you are placing (i.e. limit, Stop, MIT etc.) • Include any special instructions such as if you are filled-where you would like a stop loss and/or profit taking placed. Some Example Orders This is John/Jane Doe... • For account 82912-I would like to place an order to buy 1 September bond at the market. If filled place a stop loss at 118-25. • For account 82912- I would like to place an order to buy 2 July wheat 360 calls at 4 cents. GTC. • For account 82912-I would like to place an order to sell 1 Feb live cattle at 7050 on a stop. Day only. • For account 82912-I would like to place an order to sell 1 March orange juice at 8590 GTC. This publication is strictly the opinion of its writer and is intended solely for informative purposes and is not to be construed, under any circumstances by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of futures conditions are attempted. Futures trading involves risk. Past results are no indication of futures performance.

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