I was recently asked about stops and different types of market orders. They were good questions and they reiterated to me the fact that I work with people that range from seasoned trading professionals to those testing the futures trading waters for the first time.
One thing I always like to point out to the less-experienced traders: There are no "dumb" questions and there is no shame in being inexperienced. Every single futures trader that ever walked the face of the earth has been inexperienced at one point.
This section on types of market orders, including stops, may be a "refresher" feature for the more experienced traders, and will likely be a more valuable feature for the traders newer to this fascinating field.
Market Order
The market order is the most frequently used futures trading order. It usually assures you of getting a position (a fill). The market order is executed at the best possible price obtainable at the time the order reaches the futures trading pit.
Limit Order
The limit order is an order to buy or sell at a designated price. Limit orders to buy are placed below the market; limit orders to sell are placed above the market. Since the market may never get high enough or low enough to trigger a limit order, a trader may miss getting filled if he or she uses a limit order. Even though you may see the market touch your limit price several times, this does not guarantee a fill at that price.
"Or Better" Orders
"Or better" is a commonly misunderstood order type. You should only use "or better" if the market is "or better" at the time of entry to distinguish the order from a stop. "Or better" on an order does not make the pit broker work harder to get a better fill. It is always the broker's job to provide you with the best possible fill. If an order is truly "or better," then this designation assures the broker that you have not left "stop" off the order. In many instances, unmarked "or better" orders are returned for clarification, potentially costing the trader valuable time and possibly a fill. Orders that are not "or better" when entered only serve to better use the pit broker's time upon receipt as he checks to see whether or not the order deserves a fill. Sometimes, using the "or better" designation before the opening is helpful in assuring the broker that your order is meant to be filled.
Market if Touched (MIT) Orders
MIT's are the opposite of stop orders. Buy MIT's are placed below the market and Sell MITs are placed above the market. An MIT order is usually used to enter the market or initiate a trade. An MIT order is similar to a limit order in that a specific price is placed on the order. However, an MIT order becomes a market order once the limit price is touched. A fill may be at, above, or below the originally specified MIT price. An MIT order will not be executed if the market fails to touch the MIT specified price.
Stop Orders
Stop orders can be used for three purposes: One, to minimize a loss on a long or short position. Two, to protect a profit on an existing long or short position. Three, to initiate a new long or short position. A buy stop order is placed above the market and a sell stop order is placed below the market. Once the stop price is touched, the order is treated like a market order and will be filled at the best possible price. Importantly, while stops and MIT's are usually elected only when the specific price is touched, they can be elected when the opening of a market is such that the price is through the stop or MIT limit. In this case, you can routinely expect the fill to be much worse than the original stop or better on the MIT. This applies to stop orders and MIT orders placed before the opening of pit trading.
Stop-Limit Orders
A stop-limit order lists two prices and is an attempt to gain more control over the price at which your stop is filled. The first part of the order is written like the stop order. The second part of the order specifies a limit price. This indicates that once your stop is triggered, you do not wish to be filled beyond the limit price. Care should be taken when considering stop-limit orders--especially when trying to exit a position, because of the possibility of not being filled even though the stop portion of the order is elected. There is no stop-limit order without a second price. If your order cannot be filled by the floor broker immediately at the stop price, it becomes a straight limit order at the stop price.
Stop-Close Only Orders
The stop price on a stop-close only will only be triggered if the market touches or exceeds the stop during the period of time the exchange has designated as the close of trading (usually the last few seconds or minutes).
Market on Opening Order
This is an order that you wish to be executed during the opening range of trading at the best possible price obtainable within the opening range. Not all exchanges recognize this type of order. One exchange that does is the Chicago Board of Trade.
Market on Close (MOC) Order
This is an order that will be filled during the period designated by the exchange as the close at whatever price is available. A floor broker may reserve the right to refuse an MOC order up to 15 minutes before the close, depending upon market conditions.
Fill or Kill Order
The fill or kill order is used by customers wishing an immediate fill, but at a specified price. The floor broker will bid or offer the order three times and return to you with either a fill or an unable, but it will not continue to work throughout the trading session.
One Cancels the Other (OCO) Order
This is a combination of two orders written on one order ticket. This instructs the floor brokers that once one side of the order is filled, the remaining side of the order should be cancelled. By placing both instructions on one order, rather than two separate tickets, you eliminate the possibility of a double fill. This order is not acceptable on all exchanges.
Spread Orders
The customer wishes to take a simultaneous long and short position in an attempt to profit via the price differential or "spread" between two prices. A spread can be established between different months of the same commodity, between related commodities, or between the same or related commodities traded on two different exchanges. A spread order can be entered at the market or you can designate that you wish to be filled when the price difference between the commodities reaches a certain point (or premium).
Good Till Cancelled Orders
These orders are also known as open orders and will remain valid until cancelled.
One thing I always like to point out to the less-experienced traders: There are no "dumb" questions and there is no shame in being inexperienced. Every single futures trader that ever walked the face of the earth has been inexperienced at one point.
This section on types of market orders, including stops, may be a "refresher" feature for the more experienced traders, and will likely be a more valuable feature for the traders newer to this fascinating field.
Market Order
The market order is the most frequently used futures trading order. It usually assures you of getting a position (a fill). The market order is executed at the best possible price obtainable at the time the order reaches the futures trading pit.
Limit Order
The limit order is an order to buy or sell at a designated price. Limit orders to buy are placed below the market; limit orders to sell are placed above the market. Since the market may never get high enough or low enough to trigger a limit order, a trader may miss getting filled if he or she uses a limit order. Even though you may see the market touch your limit price several times, this does not guarantee a fill at that price.
"Or Better" Orders
"Or better" is a commonly misunderstood order type. You should only use "or better" if the market is "or better" at the time of entry to distinguish the order from a stop. "Or better" on an order does not make the pit broker work harder to get a better fill. It is always the broker's job to provide you with the best possible fill. If an order is truly "or better," then this designation assures the broker that you have not left "stop" off the order. In many instances, unmarked "or better" orders are returned for clarification, potentially costing the trader valuable time and possibly a fill. Orders that are not "or better" when entered only serve to better use the pit broker's time upon receipt as he checks to see whether or not the order deserves a fill. Sometimes, using the "or better" designation before the opening is helpful in assuring the broker that your order is meant to be filled.
Market if Touched (MIT) Orders
MIT's are the opposite of stop orders. Buy MIT's are placed below the market and Sell MITs are placed above the market. An MIT order is usually used to enter the market or initiate a trade. An MIT order is similar to a limit order in that a specific price is placed on the order. However, an MIT order becomes a market order once the limit price is touched. A fill may be at, above, or below the originally specified MIT price. An MIT order will not be executed if the market fails to touch the MIT specified price.
Stop Orders
Stop orders can be used for three purposes: One, to minimize a loss on a long or short position. Two, to protect a profit on an existing long or short position. Three, to initiate a new long or short position. A buy stop order is placed above the market and a sell stop order is placed below the market. Once the stop price is touched, the order is treated like a market order and will be filled at the best possible price. Importantly, while stops and MIT's are usually elected only when the specific price is touched, they can be elected when the opening of a market is such that the price is through the stop or MIT limit. In this case, you can routinely expect the fill to be much worse than the original stop or better on the MIT. This applies to stop orders and MIT orders placed before the opening of pit trading.
Stop-Limit Orders
A stop-limit order lists two prices and is an attempt to gain more control over the price at which your stop is filled. The first part of the order is written like the stop order. The second part of the order specifies a limit price. This indicates that once your stop is triggered, you do not wish to be filled beyond the limit price. Care should be taken when considering stop-limit orders--especially when trying to exit a position, because of the possibility of not being filled even though the stop portion of the order is elected. There is no stop-limit order without a second price. If your order cannot be filled by the floor broker immediately at the stop price, it becomes a straight limit order at the stop price.
Stop-Close Only Orders
The stop price on a stop-close only will only be triggered if the market touches or exceeds the stop during the period of time the exchange has designated as the close of trading (usually the last few seconds or minutes).
Market on Opening Order
This is an order that you wish to be executed during the opening range of trading at the best possible price obtainable within the opening range. Not all exchanges recognize this type of order. One exchange that does is the Chicago Board of Trade.
Market on Close (MOC) Order
This is an order that will be filled during the period designated by the exchange as the close at whatever price is available. A floor broker may reserve the right to refuse an MOC order up to 15 minutes before the close, depending upon market conditions.
Fill or Kill Order
The fill or kill order is used by customers wishing an immediate fill, but at a specified price. The floor broker will bid or offer the order three times and return to you with either a fill or an unable, but it will not continue to work throughout the trading session.
One Cancels the Other (OCO) Order
This is a combination of two orders written on one order ticket. This instructs the floor brokers that once one side of the order is filled, the remaining side of the order should be cancelled. By placing both instructions on one order, rather than two separate tickets, you eliminate the possibility of a double fill. This order is not acceptable on all exchanges.
Spread Orders
The customer wishes to take a simultaneous long and short position in an attempt to profit via the price differential or "spread" between two prices. A spread can be established between different months of the same commodity, between related commodities, or between the same or related commodities traded on two different exchanges. A spread order can be entered at the market or you can designate that you wish to be filled when the price difference between the commodities reaches a certain point (or premium).
Good Till Cancelled Orders
These orders are also known as open orders and will remain valid until cancelled.
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