Futures For You

INSIDE THE FUTURES WORLD

Want to learn how the futures markets really work? Dan O'Neil, a principal at online futures and forex broker Xpresstrade (www.xpresstrade.com), responds to your questions about today's futures markets.

To submit a question, post your question to our website at https://Message-Boards.Traders.com. Answers will be posted there, and selected questions will appear in a future issue of S&C.
Dan O'Neil

MAY I TAKE YOUR ORDER?

I'm just getting started trading futures and I'm confused about all of the different orders available. What are the basic futures order types, and how do I know which one to use?

Traders have several choices when it comes to placing orders to buy or sell commodity and financial futures. For example, you can instruct your broker to buy or sell at a specified price. Or you can direct the broker to buy or sell on your behalf immediately, wherever the market is trading right now. You even have control over how long your order will be active in the marketplace -- you can place an order that is good for one day or for an extended period.

Understanding how different types of orders work may make a difference in whether your trade gets executed and at what price, but not every exchange accepts every order type so it's important to check exchange guidelines before trading. Here are some common futures order types from which to choose:

Market order
A market order is the most frequently used order type. It is a good order to use once you have made a decision about opening or closing a position, keeping you from having to chase a market trying to get in or out of a position. The market order is executed at the best possible price obtainable at the time the order reaches the trading pit.

Limit order
A limit order is an order to buy or sell at a designated price. Limit orders to buy are placed below the market, while 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 customer may miss the market if he uses one. (Even though you may see the market touch a limit price, this does not guarantee or earn the customer a fill at that price.)

Stop order
Stop orders can be used to:

A buy-stop order is placed above the market and a sell-stop order is placed below. Once the stop price is touched, the stop order is said to have been "elected," will be treated like a market order, and will be filled at the best possible price.

Stop-limit order
A stop-limit order is used by the trader who doesn't want to be filled any worse than his stop price. Here, the stop and limit prices specified on the order are the same. This order becomes a straight limit order if, once the stop is elected, the broker is unable to execute the order at the stipulated price or better. In addition, a stop limit order will be placed as a straight limit order if, when received by the exchange, the stop price already has been violated.

Stop with limit order
This is preferred by the trader who wishes to give the floor broker a limit as to how far through the specified stop the order may be filled. Two prices must be stipulated when the order is placed: the stop price and the limit price. When the stop is elected, the order will be filled if it is possible without exceeding the limit price. If this isn't possible, the order becomes a working limit order. In addition, a stop with limit order will be placed as a straight limit order if, when received by the exchange, the stop price already has been violated.

Stop close only (SCO)
The stop price on a stop close will only be triggered if the market touches the stop during the close of trading. The disadvantage of this order is that a fast market in the last few minutes of trading may cause the order to be filled at an undesirable price. It can, however, protect the customer from getting filled during adverse price fluctuations during the course of the day.

Market if touched (MIT)
MITs are the opposite of stop orders. Buy MITs are placed below the market and sell MITs are placed above. A MIT order is usually used to enter the market or initiate a trade. It is similar to a limit order in that a specific price is placed on the order. However, a MIT order becomes a market order once the limit price is touched or passed through. An execution may be at, above, or below the originally specified price. A MIT order will not be executed if the market fails to touch the MIT-specified price.

Good till canceled (GTC)
Also known as an open order, this is used in conjunction with a limit or stop order. The order will remain valid and work until the trader cancels the order, or it is filled, or the contract expires. GTC orders do not cancel automatically; they remain working in the marketplace until executed or until canceled by the trader. If an order is not designated good till canceled, it is a day order and will expire at the end of the current trading session unless filled or canceled prior to the close.

Market on close (MOC)
This is an order that will be filled during the final minutes of trading at whatever price is available. Most floor brokers, however, reserve the right to refuse MOC orders up to 15 minutes prior to the close depending on market conditions.

Fill or kill
The fill or kill order is used by customers wishing for an immediate fill, but at a specific price. The floor broker will bid or offer the order three times and immediately return either a fill or an unable.

Originally published in the May 2007 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2007, Technical Analysis, Inc.

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