Introduction To Futures
The Basics of Futures Trading
Types of Orders
At the core of all risk management and trading is using the appropriate order for your market objective. The following are some basic definitions of the common order types, all of which can be replicated in Gecko Software’s Track ‘n Trade 5.0 charting software.
The market order is the most common type of order. With a market order, the customer states the number of contracts of a particular delivery month of a specific commodity he wishes to buy or sell. The price of the order is not specified, as the market order is filled "at the market" or at the current price when the order enters the trading pit. Market orders are placed when the speculator or hedger wants in or out of the market fast, since time is the most important factor in this type of order, not price. Market on Close is a common variation of this type of order, and is used when the trader wishes to have his order executed during the closing of the market (closing range). The Market on Open is another common variation, instructing the order to be filled during the markets opening price range.
The limit order specifies a price limit at which the order can be filled. The limit order can only be filled at the specified price "or better." For example, a customer wishing to buy two July Corn contracts at 210 when July Corn is trading at 211 would place the following order: "Buy two July Corn at 210, limit." Buy limit orders must be placed at the current market price or lower. The lower the price the better, and limit orders can only be filled at the specified price or lower.
A customer wishing to sell two July Corn contracts at 215 when July Corn is trading at 211 would place the following order: "Sell two July Corn at 215, limit." Sell limit orders must be placed at the current market price or higher. The higher the price the better, and sell limit orders can only be filled at the specified price or higher.
When a buy limit is placed above the market it can turn into a market order and get filled immediately. If the current price is below the limit price, the market is in a better situation and the buy limit becomes a market order. The same principle applies to sell limits: when a sell limit is placed below the market, it becomes a market order if the higher market price is better.
Gecko Software’s Track ‘n Trade 5.0 helps you learn all these rules by allowing you to simulate and practice placing these orders and making sure you have each order under your belt before ever moving on to trade the live markets.
A stop order is not executed until the market reaches the specified price level. Once the stop level is hit, the stop order becomes a market order. Opposite of limit orders, buy stops are always placed above the market, while sell stops are placed below the market.
A customer wishing to buy July Soybeans at 485 when the current market price is 475 would place a stop order as follows: "Buy one July Soybean at 485, stop." If the Soybean market trades as high as 485 or is bid at 485, the order would become a market order and would be filled as quickly as possible.
A customer wishing to sell July Soybeans at 465 when the market is currently priced at 475 would place a stop order as follows: "Sell one July Soybean at 465, stop." If the Soybean market traded as low as 465 or was offered at 465, the order would become a market order and would be filled as quickly as possible.
Example
Stop orders are usually used to liquidate earlier transactions, to cut losses, or protect profits. Let’s assume that a speculator bought three July Corn at 210 and the market is currently trading at 225. He/she may wish to protect some of his/her 15-cent profit per contract ($2,250.00 profit before commissions and fees) by placing a sell stop at 220, to protect 10 cents ($1,500 of the profit before commissions and fees). Placing the following order would do this: "Sell three July Corn at 220, stop."
There are many other different types of orders, such as stop limits and market if touched orders, but the above orders are the most commonly used and are really the only orders a beginning trader needs to learn.