Is there is one area that is ignored more than placing orders I don’t know what it would be. The average trader spots a trade and innocently places a marker order. I have placed very few market orders in my entire career.
Why?
When I see a set up that I feel will result in a profitable trade I set a buy or sell order several ticks above or below ( depending on whether I am going long or short) above or below my target entry price and let the market come to me. Granted, I may miss a trader to using this strategy. But I generally add several ticks to my profit by not diving into the market and buying wherever the broker to get me in. I want to buy at a certain price to ensure that my trade is profitable. If you think about this carefully, over the course of five or six trades this will lead three or four points to your bottom line. That fact alone makes this strategy important to implement. On the other hand, many traders are not aware of the range of orders that can be utilized. Here are some of the common orders:
Market Order
This is the most common type of the commodity futures orders used on the exchanges. When you place a marker order you instruct your broker to enter a trade at the best price he can get. One advantage of a market order is that it has priority over some of the orders we will discuss below. In any event, a marker order is always filled at the bid or ask price. Of course, I feel there are some disadvantages to market orders which make them less than advantageous to use. For example, in a fast-moving market you have little control over the price at which you will be filled. I do not like to guess at the price at which I am going to be buying. Just the same, market orders are far and away the most popular order use on the futures exchanges.
Limit Order
If you’re planning to buy or sell a commodity futures contract at a better price than is available in the market at the time you would use a limit order. There is always the possibility that the price may not reach your limit order and you will not be filled, which is a risk you run with limit orders.
Let’s say for example, you want to go long the ES contract and the price is 1000, you may place a limit order at 990 and wait for the price to be filled at your limit order price. As a matter of course, a limit order can be either a day order or an open order.
Day Order
This type of order is a commodity futures contract order and will only be entered if it is filled by the close of business on that specific trading day unless a traders specifically asks for in order to be open, it will be treated as a day order
Open Order
This order will remain active until such time as it is filled or cancel the contract expires. Another term used to describe this contract is ‘good till canceled’ or GTC.
As a trader remember to keep track of your entering open orders, as they can accumulate and then you can receive a shock when suddenly a member of orders have been filled and you have gone beyond your margin position.
Bearing in mind the following points about a limit order; limit orders work well for you as a commodities trader if your strategy sets out what you will trade, where you trade, when you plan to enter and we’re going to exit for a profit.
There is no guarantee that orders can be executed and placed because the price may never touch the selected limited price.
Even if the market touches that price, there may be a large number of orders to be filled before your order.
When your order is eventually fill the price may be different to the point you have chosen as an entry point.
Stop Order
Commodity trading markets can be very volatile and one way to limit potential losses is to place a stop order or a stop loss.
While some commodity traders believe in using a mental stop loss trading strategy, most traders will use a real stop order as part of their trading protection mechanism. My personal belief is to always have stop orders in place when I enter a trade. Mental stop orders are illusory and a very poor trading strategy.
For the sake of clarity I have included several market orders that I do not use in this explanation orders. Stop orders and limit orders are the bread-and-butter of my trading style. I have no use for open orders, good till canceled orders, or day orders. As a scalper and active trader I am interested in entering trades at the best possible prices and protecting myself against adverse moves that are unanticipated. As a trader, it is virtually impossible to anticipate unusual events involving politics or natural disasters which can move the market at an accelerated rate. Stop orders are the only way to protect yourself against these types of unusual events.
As I have said earlier in this chapter, I generally avoid entering the market via a market order. Once I spot a potential trade set up I generally set a buy or sell two or three takes above or below ( depending whether I am considering going long or short) my potential entry point. I repeat, I want the market to move to me when I enter a trade, I do not want to chase the market price in order to get into a trade.
So we’ve had a chance to look at several different market orders and excluded several others as useless for our trading style. We have agreed that stop orders and limit orders are essential for our trading and I have explained I seldom enter a trade without a stop order in place. Further, I have discouraged traders from entering trades via market order and would encourage you to place limit orders and let the market come to you. I know these are small points in trading, but overall long period of time, they can add up to a significant number of points.
