Kevin546
Contingent Orders
Apologies for not replying much sooner but I have only today, 14/10/04, noticed your post and request for an explanation.
An “if done” or “linked” or “contingent” order (pick your own term) is a stop order which is put in place automatically if, and only if, another associated stop order with which it is linked is triggered. You submit both parts at the same time to your broker or SB company. Here’s an example.
I think the FTSE is going to rally. It closed last night at 4600 and I want to enter long at, say, 4625. On all my trades let’s say I operate with an emergency stop loss of 50 points to protect me in case the market suddenly turns around and plummets. But I’m going out to play golf today and won’t be around to place the order if the market does indeed rise to 4625. I therefore submit an “entry buy stop” order at the level of 4625 which will stop me in automatically if 4625 is hit. I now go off to golf and unbeknown to me my entry stop order is hit. I’m now in the market. The problem is that I’m on the 14th green, am not aware of what has happened, and cannot put in place my initial stop loss order. I therefore have a naked, open position with no protection, which is very dangerous.
Now along comes the contingent order. This is a “combined” order which says “please stop me in long at 4625 if the market hits that level and, if it does, please also put in an emergency exit sell stop order at 4575. However, if it doesn’t hit 4625, don’t put in place the 4575 part”.
You can also have a “one cancels the other” (OCO) contingent order. In the above example let’s say that my exit stop stays at 50 below the entry level but I want to take my profits and close out the position if the market rises to 4725, a 100 point gain. The OCO element is a limit sell order at 4725 (the profit exit) and a sell stop order at 4575 (the stop loss exit). If one side of this OCO is executed it will automatically cancel the other stop. In this case you would submit the contingent order with three elements: 1. The entry stop at 4625. 2. The limit sell order at 4725.
3. The stop loss sell order at 4575. Orders 2. and 3. will not be put in place unless order 1. has been triggered. They are contingent upon, or depend on, order 1.
I think you can see just how useful contingent orders can be, especially if, like me, you are a swing/position trader who does not care to be stuck in front of a screen all day.
I hope this helps. If you have any further queries, please PM me.
