Understanding the Different Futures Trading Order Types

Essential Futures Trading Order Types

It is generally understood that trading in the futures market can produce vast gains; but just as importantly, it can result in sharp losses - even in the short term. One of the things that separates the marginally-profitable amateur trader from the successful pro is a keen knowledge of established risk-limiting techniques.

Although rudimentary, a grasp of the advantages to each type of market order (Market, Limit, Stop and their subtypes) is fundamental.

Market

In this case the trader places an order with a broker who, in turn, makes an effort to fill it at the current market price. While it is the type of order any investor will be acquainted with, its pitfall lies in its simplicity: Because it lacks provisions for the timeframe in which the order should be completed there is no assurance that it will be done so promptly.

In fact, it may, in some cases, during times of low liquidity it may take until the following day for an order to be filled. Because of the large scale of the futures markets these transactions usually take place in minutes, if not seconds.

Variants of the market order include the MOC (Market On Close), MOO (Market On Opening), and MIT (Market If Touched), among others.

Market on opening and market on closing work as their names suggest. In the former the broker executes the order when the market opens, and the latter is an instruction to do the same at the close.

Market If Touched orders are related to limit orders, which are discussed below. Orders are to be filled when the price of a commodity reaches a certain level, and continue to be filled as the price proceeds away from that "limit" price.

Limit

A limit order is employed with the intention that a commodity be bought or sold only when the market price hits a specific target point.

Market conditions and the chosen limit price can well result in the order going unfilled. With a multitude of other traders jockeying for the same commodity at any point in time, one may be beaten to the punch and end up disappointed.

Stop

Short for 'stop loss,' this tactic is used to place a boundary against loss on either a long or short position as well as to enter into a position. When placing a buy stop, the speculator will instruct the broker to act when a price above the current one is attained. When placing a sell stop, a sell price will be set below the current price.

Stop limit, stop close, and other variants are examples of more advanced tools.

The first of these requires the designation of two prices. One of these is decided in the same way as the basic stop order. The second takes the form of a designated limit. When the market price aligns with the former, the latter becomes null.

Protection from intraday price fluctuation in often-volatile markets is achieved when stop close orders are placed as the trading day comes to a close. It is an instruction to buy or sell only if the market price meets the designated stop price during this window of time.

OCO (One Cancels The Other or Order Cancels Order)

A dual-specification, "the one cancels the other" commands the floor trader to fill one or the other of two orders. When the market allows for one these two to be executed the transaction is complete and the second order is then canceled.

Fill or Kill

The type of order is canceled in the event that circumstances prevent the desired trade from taking place.