11 Orders Every Commodity Trader Should Learn
Placing a Trade with Your Broker
Before calling your broker you should have a good idea of what you would like to do. Naturally, if you are paying for her service you will be able to ask questions and request opinions in regards to the strategy and market speculation. You are paying for her expertise so you should be utilizing the services to the fullest. However, you also need to have an opinion and a plan of your own; after all it is your money not your broker’s.
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You should also have a good idea of where the market is trading. Often times, traders will place orders that are already “through their price”, this either results in the equivalent of a market order and is executed immediately or it simply gets rejected by the exchange. It is also important to realize that if you are placing orders during times in which the market is closed you are at risk of being exposed to gapping prices on the re-open of trade.
Mis-communication causes confusion and can create costly errors for you and your broker. While your broker will be able to clarify your intentions and coach you along the way, it is a good idea to be aware of the proper procedures in an attempt to avoid negative consequences for both parties involved.
Here are the most commonly used order types. If you are serious about being a trader, you should be just as serious about fully understanding each of the trading tools available to you.
Order Types
Sometimes it is the small details that make the big difference in performance. Familiarity with order types and how to properly place each of them is critical to being a successful trader. Market prices and dynamics are ever-changing, making every second count. Regardless of whether you are trading online or through a broker, knowing the type of order you need to place and placing it accurately is vital. Communication is the key. If you have questions about the different types of orders and how to place them verbally or online, call your broker for assistance. Mistakes are costly!
1. Market Order
This is the most common order simply because it is the most convenient. A market order initiates the trade at the current market value, or the best possible price at that particular time. This means that you will be taking the bid if you are selling and taking the ask if you are buying. Keep in mind that a market order guarantees that your order will be filled but it doesn’t guarantee that you will be happy with the price.
2. Limit Order
This order initiates the trade at a specific price “or better” if able. Or better is the key here. If buying a contract, better is equivalent to a lower price; if selling a contract, better is equivalent to a higher price. For example, buying 1 August Soybean at $11.05 means that the client will only accept being long from $11.05 or less. Traders should realize that the market may hit the limit price and yet not fill the order if prices don’t trade through the limit price. It is often said in the business that it “has to go through it to do it”. Simply put, if you have an order to sell the mini-sized Dow at 12,250 and that price is the high of the day, your order may not have been filled. If the high of the day is 12,251 you are owed a fill.
3. Stop Order (AKA Stop Loss)
This order becomes a market order only when the specified price level is reached. This can mean that the market trades at the stop price or the bid/ask spread reached it. A buy stop is placed above the market and a sell stop is placed below the market and is subject to the possibility of slippage on the fill. In other words, your fill price may be different that the stop price that you had originally named. This occurs because the stop becomes a market order, it is not an or better order. Stop orders are most commonly used to stop the loss of a speculative position gone bad. For instance, if a trader is long December Corn from $5.00 they may place a sell stop order at $4.80 to liquidate the position should the market go against the original speculation by 20 cents. However, this order can also be used to enter a market. If you think that a market may continue to rally once it breaks technical resistance you may place a buy stop order to enter the market with a long position if prices rally to your stated price.
4. One Cancels the Other (OCO)
This is also referred to as a contingency order because it requires that the broker cancel one of your orders should the other be filled. For example, a trader long December Corn may place a limit order above the market as a profit objective and a stop order beneath the market to limit the exposure to risk of an adverse price movement. If these are placed together as an OCO, execution of one of these orders would result in the cancellation of the other. Keep in mind that your broker is taking on a substantial amount of responsibility with this type of order and will likely only do so on a full service basis.
5. MIT (Market If Touched)
This order is similar to a stop order in that it becomes a market order once the specified price is “touched”. However, it is also similar to a limit order because a sell order is placed above the market and a buy is placed beneath. In other words, this is a special type of limit order. Rather than the trader asking for a price or better, the trader simply wants to be filled at the best possible price should the market hit their stated MIT price.
6. GTC (Good ‘Till Canceled)
These orders, often called open orders, are always considered active until filled, canceled, or replaced by another order. Beginning traders have been known to place GTC orders and forget about them only to find that disaster has struck while they weren’t watching. If you are gong to use GTC orders make sure that you properly monitor them.
7. FOK (Fill Or Kill)
These orders are limit orders sent to the pit to be executed immediately or canceled.
8. MOC (Market On Close)
These orders are executed within a specified closing range, usually 3 minutes to 30 seconds, depending on the contract being traded. Electronically executed markets do not accept MOC orders.
9. MOO (Market On Open)
This is an order for a name contract to be executed during the opening range of the market, usually the first 3 minutes.
10. Straight Cancel (Straight “Can”)
This completely eliminates a previously placed order buy may be subject to being “too late to cancel”. This typically only occurs in an open outcry environment due to the time that it takes to report fills. For instance, just because a fill hasn’t been reported to you doesn’t ensure that you haven’t been filled. Perhaps the filling broker has executed the trade but the pit clerk hasn’t reported the fill electronically in your account, this is often referred to a “keypunch”. If this is the case, they will be unable to cancel your order simply because it has already been filled. Keep in mind that a market order cannot be canceled once it reaches the exchange floor. In some markets, fills take several minutes to be reported. If you fail to be reported a fill for a market order placed in an open outcry traded contract several minutes following your instruction to execute, the delay likely isn’t in filling the order it is in reporting the fill. Thus, you can’t cancel a market order even if the fill hasn’t been reported.
11. Cancel/Replace
This cancels and replaces a previous order by changing the price, type, or quantity, but you cannot replace the commodity or contract month.
Calling Your Broker
- State your name and account number
- Specify whether you are buying or selling and whether or not it is a spread
- State the quantity
- Specify the market
- Specify the month and, if applicable, the strike price (option order)
- Specify the price and or order type (i.e. Limit, Stop, GTC, etc.)
- Specify any contingency orders such as a stop loss once filled, limit orders once filled or OCO orders
Examples
Hi this is John B. Good
“For account 36612, I would like to place an order to buy 1 September T-Bond at the market. Once filled, place a stop loss at 112’15”
“For account 36612, I would like to place an order to buy 5 July Corn 560 puts for 4 cents or better GTC”
“For account 36612, I would like to place an order to sell 3 December Live Cattle at 9500 on a stop. Day only.”
“For account 36612, I would like to place an order to sell 2 March Orange Juice at 150.00 GTC”
This content is a glimpse into Carley Garners’ book “A Trader’s First Book on Commodities“.
***There is substantial risk in trading options and futures. It is not suitable for everyone.
Carley Garner is Senior Market Analyst and Broker with DeCarley Trading, and a columnist for Stocks and Commodities. The co-author of Commodity Options and author of the upcoming book, A Trader’s First Book on Commodities, Garner writes two widely-distributed e-newsletters, The Stock Index Report and The Bond Bulletin. She provides free trading education to investors at www.DeCarleyTrading.com. Garner is a Magna Cum Laude graduate of the University of Nevada Las Vegas.
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