Order Types

A Market order executes immediately at the best price available. As long as the market is open, execution is guaranteed but the price is not.

A Limit order executes at a specific price (or better). A buy limit order specifies the highest price (below current market price) at which you are prepared to buy, a sell limit order specifies the minimum price (above current market) at which you are prepared to sell. With limit orders, the price is guaranteed but execution is not. The market may never reach your limit, and even if it does your order is not necessarily filled (depending on the number of transactions at that price).

A Stop order is used to limit losses or enter breakout trades. A buy stop order is placed at a price above the current market. If price rises to your stop price, a market buy order is triggered. A sell stop order is placed at a price below the current market – if price drops to your stop price, a market sell order is triggered. A stop order does not guarantee a particular price, especially if the market gaps through your stop loss level.

A futures day trader does not require more than these order types, although several others exist.

Example:

Suppose the Russell 2000 e-mini futures are currently trading at 803.5. Support is at 801.8. You decide to go Short if price penetrates the support level, so you enter a sell stop order at 801.7. Once the market falls to 801.7 a market sell order is triggered. (Remember, a short position is one in which you make money if the market price drops.)

Assume you are filled in your short at 801.6. You might watch the screen ready to enter a Market buy order to close the trade whenever you think appropriate. Alternatively you can use a form of automation. Enter a Limit order at your target price, and a Stop order to limit losses if the trade goes against you.

For example, being short at 801.6 you might wish to target 2.5 points profit, risking 1.2 points. You would enter a Buy Limit order at 799.1 and a Buy Stop order at 802.8. The limit order closes the trade if the market moves down to your target level, and the stop order closes the trade if the market moves against you and reaches your stop loss point.

The Limit and Stop orders need to be linked as One Cancels Other (OCO) orders. Otherwise there is a danger that the market can move in such a way that they both execute, leaving you with an open position. OCO orders are sometimes offered by the exchange, or may be simulated by your broker’s software.

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