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:
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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.
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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.
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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.
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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:
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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.
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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:
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You cannot cancel a market order; it should already have been executed.
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Many electronic markets do not allow “good ‘til cancel” orders. You have to enter a new order such as a stop every day.
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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.
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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.
