Hi guys from Andrea Unger! Today I’d like to discuss a little bit about the main order types that can be sent to a broker. In fact, I see from the questions sometimes people ask me, that they don’t have a clear picture of what the main order types are.
Main Order Types
The first kind of order you can use to enter the market is the Market Order. A Market Order, or Market Buy or Market Sell, is an order that is sent to the market to enter long or short and to buy at any price.
If you want to enter long, you use a Market Buy order. In this case, you simply enter and buy, not caring about the price. If you want to sell, you use a Market Sell order.
Stop Orders are normally written as STP. To place a Stop Order, you monitor a level that is called “stop level”. When the Market touches that level from below, you enter long with a Stop Buy Order. This is a typical breakout entry.
For instance, if the stop level is 10, you simply wait for the quotes to get up to 10. Then, as soon as the first contract is exchanged on that 10, your machine sends a Market Order to enter long.
You may enter at 10, at a better price (if there is a drop before your order is sent in a bunch of seconds) or at a much higher price (if there is a strong and very fast breakout).
When you use Limit Orders, or Limit Buy Orders, you monitor a level and sit there waiting for the market to “come and catch” it; this means that when the market reaches your level you enter, because you are there waiting to be served.
Limit Orders imply that you don’t want to buy at a level that is higher than the one on which you placed your Limit Order.
This is one of the most typical order types. If your limit level is 10, it means you are waiting to buy at 10. So, when the market comes down from, say, 11, you enter when it reaches 10.
Stop Limit Orders
You can combine Stop and Limit Orders to create the Stop Limit Order. This order type has the same structure as the Stop Order. Once prices hit a certain level, you send an Entry Order, which is no longer a Market Order (as in the Stop Order) but a Limit Order.
Most often, Stop and Limit levels are the same. So, if the stop limit level is 10, it means that you send an order to buy when the market hits 10, but that you don’t want to pay more than 10.
The risk is that, in case a strong breakout occurs, your order remains unfilled.
Since you don’t want to pay more than 10, if in the bunch of seconds that it takes your broker to send the order to the market the market goes up and never comes back to 10, you will continue waiting at 10, while the market will be trading at, say, 12. This is obviously very frustrating.
However, you can always replace different limit levels, for instance saying Stop 10 Limit 11. By doing this, you limit the maximum level you’re buying at, but you still give some room from the Stop Level to your potential entry, so that you can be sure you enter the market.
I recommend that you use this with Stop Losses, where you want to exit but you don’t want to stay in the market, so a pure Stop Limit Level can be dangerous, because you might stay there unfilled, and in dramatic cases it would imply heavy losses. So, either you use Stop Orders or you place a limit at a certain distance and you are pretty much sure to exit in that case.
Less Used Order Types: MIT Orders
Sometimes people use the MIT Order, i.e. Mark If Touch Order. This is a version of the Limit Order in which you don’t sit there and wait, but you wait for prices to hit a level and then, if and when they do it, you send a Market Buy Order. This way, you are sure to enter.
The reason why we do this is that, sometimes, the level on which we place the order is already filled. In fact, there are also the orders of the other traders who want to enter. So, our order may be one in one thousand. Just think of the e-Mini S&P. We can’t be sure that the level we enter is actually the best level, because there can be many others who enter before us.
So, in order to be sure to enter the market when it hits the level, we can normally enter at least at one tick worse than the desired level, so that we can avoid the frustration of being unfilled, which can happen with Limit Orders.
These are the main order types. You can do every thing with them!
Ciao from Andrea Unger! See you next time!