Stop and market open question

[Jim Nasium]

Hey,

I have been paper trading for a few months and yesterday threw up something I am not sure how to account for seeing as I have never actually traded properly.

Say I was trading an equity through a broker like IB, I have a market order (I know I should be using limit orders but at this stage can't bare the thought of not getting filled) to go long on the open at say 500 with a stop at 490, the market gaps down and opens at 485 (I am assuming here a market order will fill me at 485?) below my stop but ends the day up. Would my trade not be executed, or would I be long without a stop loss...or something else?

Would really appreciate any input.

 

[nine]

Hi Jim.

If you have a buy market order on the exchanges server along with a sell stop order they will both fill. I'm not sure which would fill first (probably the market as the stop has to be triggered to generate a corresponding market order) but the chances are that market action will fill them in such as way that you incur two commissions and a little intraorder slippage.

If you wanted to deal with this I'd take the approach of placing the first order with the second order relative to it. Or you could use some sort of "place market order if "followed by a "place stop order contingent on the first order being triggered."

 

[TWI]

I have a market order (I know I should be using limit orders but at this stage can't bare the thought of not getting filled) to go long on the open at say 500

Firstly, market order does not have associated price that is why it is a market order so scrub the "say 500". Market gap down opens at 485 then you are filled at offer price. Once you have a position your stop becomes live and will execute as market order and fill you at bid price.
Likely you would have 2 orders execute back to back and pay 2 costs and bid/ask spread.

Better to use stop order entry or a stop exit at a price contingent on your entry price.

 

[Jim Nasium]

OK, basically have a stop which is 2% or x pips away from whatever price you get filled on, awesome. I guess I miss a few basics using Google Documents as my trading platform.

So say in the last example I am long and the price is rising, is there a market order I can use to say "if the price hits 550 sell"? Reason being I am only using end of day data due to work hours and there was a situation not long ago where my position hit the price target I had in mind then sank like a brick with me being none the wiser till I got home that evening.

 

[nine]

If price has to rise to 550 to sell then thats a limit order. If it has to fall to 550 to sell then thats a stop order (sell 550 stop). So in the case you describe you just have sell 550 stop (if you just say stop, you mean stop market which means that when the stop price is reached a market order is exposed to the market and filled at the bid in the case of a sell).

Note 1 that you can define your stop conditions with some brokers ... you might require two ticks at 550 to trigger the stop rather than just one.

Note 2 that you could use a stop limit order to define acceptable slippage - sell 550 stop 549 limit but you tend to use them for entry because when you are wrong you need to get out and normally in that situation you get out you don't worry about slippage.


>>>>>>>>>>>

Take the example where you were entering a positions using sell 550 stop 549 limit:

With any of those orders a good broker will let you include a bracket contingent on the entry order being filled. For example, with IB I might use the stop limit above to enter and have included a 5 pt stop and a 10 pt target from the entry point ... so once the first order was filled at 549.5 and I had a position then IB's computer would create a target at 539.5 and a stop above at 554.5. They would be OCO (one cancels the other) so that if the target is hit the stop is removed and vice versa.

Make sense?

 

[Jim Nasium]

Ja right, I didn't mean market order there, but yes that makes perfect sense I think that will be really useful, thanks for the help.