Placing orders can be confusing. No one was born with a mouse in hand, and it is easy to enter the wrong type of order or click on the wrong side of the trading floor.
Therefore, before you start trading, you need to familiarize yourself with order types and practice placing orders in simulated situations. Trading mistakes can turn an otherwise profitable trade into a major loss. Every trader has mistakenly placed the wrong type of order and suffered financial losses as a result.
If you trade different indices simultaneously, you might even enter the wrong market because the domes all look so similar. I remember one day recently when I intended to trade the S&P Index Futures. Don’t ask me how I did it, but I actually placed a trade for Japanese yen. I realized immediately that I had just purchased the Japanese yen after making the trade. I focused on getting out of that market and stopped everything else.
By chance, I landed a profitable trade, but I would still have gone through with it had the outcome been different. It’s important to pay attention rather than take chances, so I always plot, plan and strategize beforehand. That being said, even experienced investors can err when placing orders. Consequently, you must become knowledgeable about order placement and hone your technique before entering the market. This will prevent countless errors and should help boost your profits. Now let’s delve into order placement!
Orders enable traders to enter and exit the market. A buy order indicates taking a long position or closing out a short one, while a sell order signifies going short or covering a long position. If you want to buy or sell at a specific price, you have to place a buy stop order above the current market price or a sell limit order below it. Incorrectly entering either one will automatically turn your order into a market one, meaning it will be executed immediately at the present rate.
This is a problem because if the S&P 500 Index Futures trading at 1005.00, and you are long (meaning you bought the market at 1003.00), but you wanted to take profit when the market reaches 1007.00, then when moving your cursor to the trading dome in order to execute a sell limit at that price, an incorrect click of the mouse causes an immediate market order instead of a limit order; thus, you end up with only 2 points of profit instead of 4.
You want to enter the market at 1005.75, so you place your order. However, an accidental entry of a limit order instead of a stop order causes the order to be immediately sent out and causes you to enter the market at an undesired price. This could potentially cause you a loss if the market fails to rise up to your anticipated point of entry. In the next sections, we’ll review some basic order types.
Order of the market
When a market order reaches the exchange, it will be executed immediately at the best price available. Only a market order guarantees execution. When placing an order, remember that the bid price is the price at which the buyer will be willing to pay, and the ask price is the price at which the seller will be willing to sell. In a rapidly moving market, expect some slippage with market orders.
Orders to stop
Once the underlying instrument’s market price reaches or exceeds the specific price specified, a stop order becomes a market order. This is a hold, or contingency, order that will not be elected until the market reaches a specific price. Its execution is contingent on the market.
You can use this type of order to preposition your order for entry into the market, or to protect your order from slippage. There may be slippage with this type of order. The execution of this order is not guaranteed, as your price may not be reached and your order may not be fulfilled.
Orders with a stop-limit
A stop order and a limit order are combined in this type of order. In this type of order, the trader specifies a stop price (the price at which an order is elected) and then specifies a limit price. When the stop price is reached, the order becomes a limit order.
MIT stands for Market if Touched
When placing a limit order, you aren’t guaranteed a fill unless the market trades through the price you’ve set. This order may be used instead of a limit order. An MIT, on the other hand, is sent directly to the floor as a market order once the price has been hit. Therefore, the order will be executed immediately if the price is hit.
Cancelled Order (OCO)
Some trading platforms do not support OCO orders, however some do. This type of order allows a trader to have multiple orders run at once – if one is executed, the other gets automatically eliminated. An example of this would be if a trader buys an S&P e-mini at 1122.00 and wants to take profits at 1125.00 with a protective stop at 1119.25 – an OCO order can help ensure that, in the event of either profit target being met or the market going against them and hitting their stop, no further action needs to be taken as the remaining order will already have been cancelled. Many traders take advantage of this feature when it’s late or early on in the day, which can reduce the risk of having orders on the books they had previously forgotten about executing.
Slippage: A Note
When an order is placed, it may not be executed at the desired price. You would like to buy IBM at $90.00 per share, so you place a stop order. However, your order isn’t filled at $90.00, but at $90.10. You had slippage of ten cents per share. Limit orders can help reduce slippage when possible.
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