Order Flow Boot Camp

How to Enter Orders

From Stop-loss to Fill or Kill

In our Live Trading Room, we frequently publish order boards and speak about latent orders, stop losses, bids/offers… but what exactly are they and why do we highlight them? It’s time to explain more in detail what the various types of orders are, why traders use certain orders and what their importance is from an order flow perspective.

1. Finding a counterparty

Let’s start from the basics. If you want to buy something, you need someone to sell it to you. In the financial markets, being able to find a counterparty quickly is called liquidity. The same things applies if you are trying to sell something: you are looking for a buyer to take your inventory.

Liquidity is a very important factor in trading, and it becomes more and more important the larger you get. So for the common retail trader, liquidity is never a concern. For the professional, that is moving millions of dollars every trade, liquidity is essential. Without liquidity, he cannot do business. Generally speaking, the more liquid a market is, the more it will attract other traders. Large traders cannot simply think about how much price will move, but also how they will get out of their trade when the time has come.

Yup…big boys know how essential liquidity is…

When you enter a trade order, you are instructing your broker to enter or exit a position. At first, placing trades may seem overly simple: push the “buy” button when you want to buy, and push the “sell” button when it’s time to bail. While it is possible to trade in this simplified manner, it is not very efficient, as it requires constant monitoring and it exposes traders to unnecessary risks.

If you use only the buy and sell buttons, you may experience losses from slippage and from trading without a protective stop-loss order. Slippage refers to the difference between the price you expected to exit at, and the price at which the trade was actually filled. In fast-moving markets, slippage can be substantial and make the difference between a winning and losing trade. Certain order types instead, allow you to specify exact prices for trades, thereby minimizing the risks associated with slippage.

Slippage: best to avoid it by using stop losses and/or limit orders.

So now let’s explore the various order types, from the simple types to the more complex types. The natural question is: which one should I use? The answer, as we will see, depends on what you are looking to accomplish.

2. Basic orders: Market Orders

Market orders are the easiest order type out there. It instructs your broker to buy (or sell) at the best price that is currently available. Graphic user interfaces (GUIs) usually have “buy” and “sell” buttons to make these orders quick and easy. Typically, this type of order will be executed immediately. The primary reason for using a market order is to get a guaranteed fill. If you absolutely need to get in or out of a trade, a market order is the most reliable order type. The downside, however, is that market orders do not guarantee which price you will be filled at, and they do not allow any precision in order entry and can lead to costly slippage. Using market orders only in markets with good liquidity can help limit losses from slippage.

Big Buy and Sell buttons for market orders.

Brokers make it really easy to risk your hard earned money.

3. Limit Orders

A limit order is an order to buy (or sell) at a specified price or better. A buy limit order (a limit order to buy) can only be executed at the specified limit price or lower. Conversely, a sell limit order (a limit order to sell) will be executed at the specified limit price or higher. So you, as a trader, need to specify which price you wish to do business at. Of course, limit orders protect you from slippage, but they do not guarantee you will be filled.

Limit order entry on YM to buy at 16300. Note that the limit BUY is always lower than the current market price. A limit SELL would always be higher than the current market price.

Successful example of a limit BUY order.

Limit orders allow traders to enter and exit trades with precision; however, they must be entered correctly to ensure that they accomplish the goal of improving price – that is, to get a specified price, or better, on a trade execution.

4. Stop Orders

Yes, it’s true: the stop loss is not the only type of stop order. You can also use a stop entry, to buy or sell an asset. A stop order to buy or sell becomes active only after a specified price level has been breached. Stop orders work in the opposite fashion of limit orders: a buy stop order must be placed at a price above the market, and a sell stop order must be placed below the market. Once the stop level has been reached, the order is automatically converted to a market order. In this sense, a stop order acts as a trigger for the market order.

Consequently, stop orders are further defined as stop-loss or stop-entry orders: a stop-loss order would be below the market price if you are in a long trade. A stop loss order would be above the market price if you were in a short trade.

An example of a stop entry and stop loss combination: shorting an asset.

Another application of a stop order is the trailing stop. You can dynamically pull your stop up (or down) following the peak/trough movement of price, in order to lock in more profits if the trade grows a pair of legs.

A successful demonstration of a trailing stop.

5. Conditional Orders

Conditional orders are advanced trade orders that are automatically submitted or canceled if specified criteria are met. Conditional orders must be placed before the trade is entered, and are considered the most basic form of trade automation. Two common conditional orders are the order cancels order (OCO) and the order sends order (OSO). Here we will speak about the OCO as many retail brokers allow this type of trade entry.

5.1 One-Cancels-the-Other Order or OCO

An OCO allows you to place several orders simultaneously. When one is filled, any remaining orders in the group are automatically canceled. The OCO is useful for both trade entries and exits. A bracket order, which places simultaneous stop and limit orders in the market, is perhaps the most popular use of an OCO. In an OCO bracket order, once either the stop or limit orders are reached, the remaining order is automatically canceled. The stop order serves as a protective stop-loss order in case the trade moves in the wrong direction; the limit order serves as a profit target. So a single OCO order can actually submit 3 single orders at once.

6. Order Limitations

One last question you may have is: what type of limitations can I place on an order? Generally speaking, the limitations for orders can regard Time and/or execution.

6.1 Day

A time-in-force limitation on the execution of an order. This limitation, for US brokers, has a default order expiration time of 4:00 p.m. ET. Some brokers also let you select your own order expiration time between 10:00 a.m. ET and 4:00 p.m. ET in certain increments. If all or part of your order is not executed by the time you’ve selected for expiration, your order will be cancelled.

6.2 Good ’til canceled (GTC)

A time-in-force limitation. This limitation has a default order expiration date of 180 calendar days from the order entry date. If all or part of your order is not executed by the date and/or time you’ve selected for expiration, any open portions of your order will be cancelled. Most day-to-day orders are GTC.

6.3 Fill or kill (FOK)

A time-in-force limitation that can be placed on the execution of an order. This limitation requires that the order is immediately completed in its entirety or canceled. Orders with the fill or kill limitation generally:

– are only placed during market hours

– are good only for the current day

6.4 Immediate or cancel (IOC)

A time-in-force limitation that can be placed on the execution of an order. This limitation requires that a broker immediately enter a bid or offer at a limit price you specify. All or a portion of the order can be executed. Any portion of the order not immediately completed is canceled.

6.5 On the open

A time-in-force limitation that can be placed on an order. This limitation requires that the order is executed as close as possible to the opening price for a security. All or any part of the order that cannot be executed at the opening price is canceled.

6.6 On the close

A time-in-force limitation that can be placed on the execution of an order. This limitation requires that the order is executed as close as possible to the closing price for a security. All or any part of the order that cannot be executed at the closing price is canceled.

7. Some useful Jargon

A bid is a limit order to buy an asset at a specific price (better than the current market rate) and an offer is a limit order to sell an asset at the determined price (better than the current market rate). Bids and offers make liquidity in a market, they provide it to participants which trade via market orders.

To sum up: not all orders are created equal. Depending on what type of action and what limitations you want to create for the particular trade setup, you may want to use more specific order types. We have seen the main order types: Market orders, Stop Orders, Limit orders, Conditional Orders and the time/execution limitations. What we did not cover is HOW the various order types influence liquidity and how we can take advantage of this knowledge.

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