Futures Trading Guide: Order Types and How to Use Them

Exclusive trading order entry lesson by Craig Ross, Apex Futures

The purpose of this article is to explain the different order types accepted by the exchanges and also some advanced order strategies your trading platform can maintain for you. Since the electronic markets make up over 70% of all futures trading we are going to limit our discussion here to the three main types of orders accepted and most frequently used on electronic markets like the CME and the most popular types of advanced order strategies.

Market Order

This is the most basic and frequently used order type which tells the exchange's computers to execute your order at the next available price. So, if you are buying your fill price will be the next available offer and if you are selling your fill will be the next available bid, therefore this does not mean you will necessarily receive the "last price" or last quote you saw. Many new traders will look at the market and might see a price of 995.50 as the last quote or trade and then they place a market order to buy which is filled at 995.75 and they wonder why they did not receive a price of 995.50. The reason is the last price of 995.50 is just that, the last price and not necessarily the next price. To get a better indication of where you might be filled you need to look past the last price and at the current bid/offer, which in our example may have been 995.50 bid at 995.75 offer. This means anyone who is buying at the market can buy at 995.75 and any sellers at the market will be filled at 995.50. This difference between the bid and offer is known as the spread and is typically one tick in a liquid market like the Emini S&P. Now, of course there is still a chance you may not receive the bid or offer price as your fill because the market can still move in the milliseconds between the time you click and the time your order reaches the exchanges computers, but this can work against you as well as for you. The advantage to using a market order is that you can always expect to get a fill (assuming there are buyers or sellers available) in the quickest way possible. The disadvantage to market orders is that in a volatile or fast moving market you may not get the last quoted bid or offer, but if things are moving fast you may not be able to afford to wait or work a limit order.


 

Limit Order

This is an order to buy or sell at a designated price, a limit to buy is placed below the current market price, while a limit to sell is placed above the current market price. If the last price is 995.50 and you only want to buy if the market goes down to 993.50, you can place a Buy Limit order at a price of 993.50. Since all orders are filled on a first in, first out basis (FIFO), this order will be placed in the queue on the exchange's computers. In other words if you look at the level II quotes on your Depth of Market (DOM) you will know ahead of time the number of contracts that are in front of you and therefore need to get filled before you will receive a fill. For example, if you look at the DOM and at 993.50 it says there are 2,100 contracts already trying to buy, then your order to buy will be the 2,101st contract to be filled (assuming none of the existing orders to buy are cancelled). Keeping this in mind don't expect to receive a fill just because the market falls down to 993.50 and trades there once and then pops back up. You will most likely need to see the market trade there several times, or enough times for there to be 2,101 contracts traded. Of course the same procedure holds true for Sell Limit orders but they would be placed above the current market price.

Stop Order

These are most commonly used to stop the loss on a position, which is where it obviously got its name from, but these orders can also be used to enter the market. A stop order to buy is placed above the current market price and a stop order to sell is placed below the current market price. Stop orders are price orders that turn into market orders once the designated price trades. Let's say the last trade is at 995.50 and you want to sell if the market falls to 993.50, you would place an order to Sell at 993.50 on a Stop. If and when the market falls to 993.50 your Stop order will turn into a Market order to sell at the next available price. Once triggered, the order competes with other incoming Market orders therefore Stop orders do not guarantee you an execution at your Stop price, but in a liquid market under normal conditions you should expect to receive your Stop price of 993.50. But, let's say a news report was just released and the market really falls fast on high volume, then you may receive a fill price lower than your intended price and this is called slippage.

The following advanced orders types are not accepted by the exchange's computer which means they need to be managed by the Infinity AT trading platform software on your computer. These orders can be entered manually by the click of a button after you enter a position or you can set them to be sent automatically when you enter a position. These advanced order types are very useful and can be a very valuable trading tool, but it is important to remember that for them to be fully functional your DOM needs to be open and your internet connection active for them to be maintained by the trading platform. Therefore, it is important to contact us should your computer go down or you lose internet connection so we can check your account and do any required trade management for you.

Bracket OCO (Order Cancels Order)

A bracket order is actually two separate orders that are placed around or "bracketing" a position, one of the orders is your Limit order to take a profit and the other is your Stop order to get out at a loss. This type of order forces you to have a predetermined profit target and stop loss point and even though the stop price is not guaranteed, this is a much more reliable way to admit you are wrong and take a loss since this order is working at the exchange and not dependent on you to pull the trigger to get out since many new traders act like a deer in headlights when they rely on themselves to manually exit a losing trade. The other benefit of this strategy is that once the profit or loss order is hit, the trading platform will cancel the remaining order for you, this is the OCO part, or Order Cancels Order function. Let's say you buy a contract at the Market and get filled at 995.50, and want to either get out with a 2.00 stop or 3.00 profit; the trading platform can automatically place a bracket order with a Sell Stop at 993.50 and a Sell Limit (target price) of 998.50. If the market hits your Limit price of 998.50 and fills you, the platform will then automatically cancel your Stop order at 993.50. Important: ApexTrader allows you set these levels before you enter the initial position and you will see these orders on your Active Orders screen with a State of "Held," these bracket orders have been received by our servers and will be placed once you enter the market. This means if you lose your internet connection or have computer issues when your Bracket needs to go in, the servers will still place and manage the orders for you. This is important because most other trading platforms rely on your computer to place these orders, which means there is more of delay when they get placed and they will not go in at all if you are having computer issues.

Trailing Stop

A trailing stop allows you to enter a Stop loss order and have it move as the market moves in your favor based on your preset parameters. This allows you to lock in a potential profit if the market moves in your favor. I am sure you have seen a trade go in your favor, only to see it come back and stop you out for a loss, this type of order will hopefully prevent that from happening. Let's say you are long from 993.50 and place an initial Stop at 991.50 and then the market moves in your favor to 995.50. At this point you can have the Stop moved up to 994.50 and then continue to ratchet up until it comes back down and stops you out, but don't forget as stated above it does not guarantee you get out at your exact stop price. All of this Stop movement is done automatically by the trading platform based on predetermined parameters you setup before the trade even begins.

Multi Bracket

This advanced order type allows a trader who trades with multiple contracts to set up to three different targets and three different Stops which can also be set to trail, should you choose.

Please call me if you have any questions on these order types or if you need any help executing them on the ApexTrader trading platform.

Craig Ross
ApexFutures.com
800-208-6564
312-267-2278
Fax: 312-267-2266

Trading Futures, Options on Futures, and retail off-exchange foreign currency transactions involves substantial risk of loss and is not suitable for all investors. You should carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources. You may lose all or more of your initial investment. Opinions, market data, and recommendations are subject to change at any time.

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