• Stop Order vs Limit Order and More

  • Types of Orders

    There are many different ways to place an order, and I want to give you some specific explanations of the most common types of orders. 

    Which type of order you use will depend on several different factors, based on your objectives for each particular trade. It is extremely important that you understand the type of order you are placing. Millions of dollars have been lost by entering the wrong types of orders. Once placed, it’s a done deal. Mistakes can be very costly, but they can be avoided by having a good understanding of what you are doing. 

  • If you are using a broker, make sure your broker has a clear understanding of what kind of order you are placing.

    With Track-n-Trade charting software, you can actually place your comments on a chart with your entry price, stops, etc. and e-mail it to your broker if you use one BEFORE you place the trade. This is a great way to avoid “miscommunications” that sometimes happen.

  • If you call in an order, make sure you broker repeats your order back to you. If you are not certain that what he or she is telling you is what you meant, stop right there and get it straight!  Tomorrow is too late! 

    The following are the most common types of orders: 

    Market Orders.  This is the most common type of order. When you enter a market order, you do not specify a specific price. You simply state that you want to go long, or short, “at market.” When you place this type of order, it goes to the trading floor and is filled at whatever the current price may be. Most of the time, it’s filled fairly close to what the price was when you placed the order, but in “fast” or “thinly traded” markets it could be very different, so be careful, and learn about the markets you are trading. Not getting filled at the same price is also known as “slippage.” 

  • Stop Order vs Limit Order

    Stop OrdersStop orders are not executed until the price reaches a specific point. When the price reaches that point, the stop order becomes a market order. Most of the time, stop orders are used to exit a trade with a loss. You may have a stop order to get out if the market hits 65.00, as an example if you were long from 70.00. When the market hits 65.00, your stop order becomes an open order at 65.00 to exit the trade. You will probably “get out” at that price or very close to it. But in a fast market you might get out at 64.75, not 65.00. Again this is called slippage. 

    You can have a “buy stop” order ABOVE the current price, which means you want to buy a contract, or go long if that price is hit, and you can have a “sell stop” order UNDER the current price, which means you want to sell a contract, or go short if that price is hit. This way, your order is filled at that price or better.

    Limit Orders.  Limit orders simply state a price limit that your order must be filled. In other words, it must be filled at the price you specify, or better. Limit orders have the advantage that you will know the worst price that you will be filled at. One disadvantage is that you might not get filled at all if the price that day does not trade within the price you requested.

  • Day Order. Day orders are good for only one day; the day you place the order. Let’s say you want to go long Sept. Sugar. You call your broker and place a day order (as a limit order or a buy stop order) at 6.50. This order would be good only for the day you placed it. If the market did not reach 6.50 that day, your order would not be filled. As an example, if the highest price Sugar reached that day was 6.49, and your order was at 6.50, your order would not be filled. Sugar could open the next day at 6.50, and rally to 7.00, but you would not be in the market since your order the previous day was a day order and good only on that day. If a Day order is not filled the day you place it, it’s canceled at the end of the day. You have to place the order again the next day.

    Good till Canceled (GTC). A GTC order simple means that you place your order and it “sits there” until it’s filled. It’s also called an open order. You must tell your broker that it’s a GTC order, or he/she might place it as a day order, and you might not want that to happen. I don’t suggest that you use these very often unless it’s your protective stop order but if you do, you had better review EVERY open order you have at the end of the day. You will learn why later.

    As an example, you want to go long September Wheat at 290 because of something you see on the chart, and if it reaches that price, you want to be long the market. You would call your broker (or place the order online) and place an open order GTC to go long, just above 290. This order sits there until it’s filled, even if it takes three months to fill it. The order is always “open” until you cancel it or the contract expires.

    You must keep a very close watch on your open orders. If you place an open order and forget about it, it may get filled weeks later, and that might not be what you want at the time. Again, don’t ask me how I know about this! You should keep a list of all your open orders and look at it every day. If you decide that you no longer want one of these as an open order, you have to call your broker and cancel it or if you are on a live software trading platform you must cancel the order yourself. It’s your responsibility to keep track of your open orders.

    Also, when you place a stop loss order, make sure it’s a GTC Order and not just a Day Only order.

    Needless to say, a mistake like this can be costly. You can ask me about my experience in this!