Teacher and consultant to the futures industry since 1983
Teacher and consultant to the
futures industry since 1983
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TRADING TIPS Know what types of orders there are and how to use them. Over the next few weeks we will cover the different types of orders and what they mean. We will also explain how and when to use each one. Everyone thinks they know all about orders and yet in our Series 3 classes, we find that even the "old-timers" can learn something from the "orders" section in the sessions. Let's start with the Market order. We discussed this order a bit before, but you must know what it means. If you place an order to buy or sell "at-the-market", it means you want the order done right away; and this order entitles you to "an immediate execution, at the best available price. This is also the highest priority order. Some people will say NEVER use this order and some will say ALWAYS use it. Just remember that if you know the markets you are trading, you will know when you can use this order without being taken advantage of. Market orders are important and very useful. Probably the most common order... the Limit order. The Limit order does just what it says, it limits your fill price to the price you set, or better. If you are a buyer, your fill can be at or lower than the price you've set. If a seller, the order can be filled at or higher than the price you stated. These orders assure that you will never get a worse price than what you want, but unlike the market order, which is filled at once, this order may never be filled if the price doesn't reach the limit you've set. Also be aware of the fact that, to be sure of a fill, the price must move through the price you set. There is also at least one market conditions that may occur that could prevent this order from being filled even if the market does move through your price. We will discuss that next week. "FAST"... The Fast market. A "Fast" market condition exists when the activity on the trading floor increases dramatically due to a rumor, or market fact. This can happen, for example, when supply numbers are released, or when the head of the Federal Reserve speaks before a committee. When the markets begin getting unruly because of an increase in order influx, the Floor Governor may call a "Fast Market. Since this is a time when floor brokers could make mistakes, during the "fast", brokers are not required to fill any orders. This is called "broker not held". At this time, even if the price moves through your order to buy or sell at a limit price, your order may not be filled. This is one reason that nobody can ever guarantee you a fill. Another condition is called a "Limit Move", and that's for next week. Limit Move... "Lock Limit". A limit move is a move in the price of a commodity to the amount allowed by the Exchange on which it trades. Many futures contracts have limits, and many do not. You had best know about the possibilities when you trade a contract. Take the soybeans for example. There is a 30 cent trading limit on the beans. The limit will expand under certain conditions, but let's concentrate on the basics. With the right (or wrong) input, the price of soybeans could go up or down 30 cents in a matter of seconds. What does this mean to you? Well, assume you bought one soybeans contract and had intended to risk about $500 (10 cents x the contract size of 5,000 bushels), and you placed a stop-loss order 10 cents below your entry point. If the price moves down 10 cents, you will sell the contract and take the loss. Now assume that some information hits the market about this being the best crop in decades. Chances are the price will drop... and very quickly. If the price dropped 30 cents so quickly that it went through your order to sell so fast that it hadn't yet been filled, you are literally stuck in your position. The price is now $1,500 against you, (30 cents x 5,000 bushels) and you CANNOT get out. Remember, to get out you must SELL. If there is nobody willing to pay the current price, (thinking it may still go lower) your order can't be filled. You must say your prayers before the market opens tomorrow because if the price goes limit-down on you tomorrow you may still not be able to exit the position. If the limits have expanded to 45 cents, and they probably did, you are now stuck in the position with a current loss of $3,750. See, I keep telling you to KNOW the markets you trade. Be sure to call with any questions. The "MIT" (Market If Touched). The MIT is a great order. If you are one of those people who use limit orders and have the misfortune of having the price move to your limit price then moving away again, only to find out that you were not filled because the market never moved THROUGH you price, this may be the answer. This order "says" that if the price touches the order price on the ticket, the order becomes a "market order" and should be filled as quickly as possible at the best available price (see 7-4-99). As an example, you have seen the price of December gold hit $255 per ounce several times. You place an order to buy at $255 limit. The price may get to $255 per ounce, over and over again, but if it doesn't trade through your price, you are not entitled to a fill on your order. Now assume you place your order to buy at $255 MIT. If you are again right, and the price hits $255, your order becomes a Market order to buy. You can be quite sure your order is now filled. (unless the "broker not held" condition exists or the price is locked limit). Remember though since your order changed to a market order, you can be filled at any price. In normally operating market conditions you will be filled very near your price (if not exactly on it). You could, however, be filled at $255.10 or $255.40 etc., etc. I have used these orders extensively, and have very often been helped by them, and very seldom been hurt by them. Again, know your markets and check with your broker since MITs are not accepted on all trading floors. Stop Order. Many believe that the Stop Order is to limit losses only... Not the case. You should remember that there are three things an order can do; put you into the market, take you out with a profit and take you out with a loss. EVERY order there is can do all three things! The "Stop" got it's name from "Stop-Loss", but is can be used for all three purposes. If you are currently in a long position and wish to protect against too much loss, you could enter a sell-stop order below the current price. If the market moves against you and touches the stop price, the order becomes a market order to sell. Since it is a market order, you could be filled at any price of course, but at least you should be out of the market. Lets say you are long Soybeans from $4.25 and the price is at $4.85. You may wish to put a sell-stop at $4.75. If the market moves down and touches your stop and you happen to be filled on the stop price, you would have been taken out of the market with a profit of 50 cents per bushel. Now assume you are not in the Soybean market at all, but you believe that if the price goes above $4.82 that the price will make a continued move up and since the price is currently at $4.76 you don't want to enter yet. You could place an order to "buy at $4.85 Stop". Now, if the price of Soybeans moves to $4.85, your order would become a market order to buy Soybeans. If you were not in the market before, you are now in a long position in the Soybeans. REMEMBER, there are both buy and sell stops, and be sure to ask your broker how to use each one, or call me with questions. Good 'Til Cancelled (GTC) or "Open Order". You should know that every order you place is good only for the day it is entered. It is a "day order" and is marked "unable" or "nothing-done" if not filled by the end of the trading session. Well, if you are in the market and wish to place a protective stop-loss order, you certainly don't want to have to place it each day while you are in the position. That could mean you are placing the order every day for a week or month. So, when you enter your protective stop (or for that matter, any order you want to last for more than a day), tell your broker that you want to place and "Open Order" or "GTC". WARNING: Remember that you have an open order, because if you no longer want it and forget to cancel it, the order could be filled months from now and it is your fault. One-Cancels-Other (OCO). This order can be helpful if you wish to place two orders on the same ticket. Let's assume that you would like to buy Gold futures today. As an example, say the December price is at $253 / ounce, and you believe the price will drop about $3 before it proceeds higher. You would like to try to get in when it does drop to $250, but no matter what, you would like to get in a position by the end of the day even if it doesn't drop. You could place an order that reads: "Buy 1 December Gold @ $250, OCO Buy 1 December Gold Market-on-Close". If the price of December Gold drops to or below $250 / ounce during the day, the floor trader will attempt to fill your order. If the order is filled at $250, then the second half of the ticket is cancelled. If however, the price never gets to $250 for the day, the broker will buy 1 contract of December Gold on the close, at the market price. Keep in mind what that means. If December Gold has rallied during the trading day your order will be filled at the "going" price during the closing of the trading day. This means you could get ANY price. Also remember that the OCO order is not accepted on all trading floors and you should check with your broker to see if they are accepted on the exchange where you are trading. Time/Price Discretion (T/P Disc). Now you want to get long November Soybeans and the current price is $4.75 / bushel. You know that if you try to get that exact price, your limit order will probably not be filled. So, try this... Place the order with your representative to "Buy 1 November Soybean at $4.75 with a 2 cent DRT". This tells your representative that you want to buy at $4.75, but you are willing to pay up to $4.77 / bushel. The "DRT" means that you are giving the floor broker the opportunity to fill the order at their discretion, and you will not hold him/her responsible (Broker not held for DRT orders), as long as the price is somewhere in that range. Great orders, and you will probably get a good fill since this order shows confidence in your floor broker... and they like that. Market-On-Open (MOO) / Market-On-Close (MOC). The MOO and MOC are good orders, but you had better be ready to get "ripped" on the fill. This order follows the rules for a Market Order, but is done within the opening or closing "Range" of the day's trading. The range is determined by the Clearing House and will be the low and high prices that were met during the period of time known as the opening or closing. The time period varies from trading floor to trading floor and could be as short as 10 seconds or as long as a minute. If you have an order to buy or sell on the open, you are entitled to a fill within the range that was set in that opening period. Same goes for the close. Keep in mind that you can't argue about the fill price so long as it falls within that range. Also keep in mind that in cases of fast markets and limit moves, you may not even receive a fill price. My own experience tells me to use these orders very sparingly and you must REALLY know the behavior of the trading floor for the contract you are trading. NOTE: Enough with the orders for now... If you have any questions about specific order types, call me and we can discuss them. You now should have enough information and order types that you can easily handle an account efficiently. Be sure you understand all of the orders listed above before you trade by yourself. There are of course, other kinds of orders that I have not gone into since they are more sophisticated and in most cases will not be needed. It is important to get back to very relevant issues. Research your brokerage choice before opening an account. I have said before not to be afraid to open an account with a brokerage firm and representative that prospects you by phone. Well, that doesn't mean you should allow a rep to convince you to open an account based on one single phone call. You must speak with others before settling on a firm and a representative. I recently received a couple of email messages from new traders who opened an account with a firm that charges $195 to buy an option and $195 to sell it. I don't care how you cut it, that's just plain theft. When you can do the same trade with a full service broker for $50 TOTAL, shop, and stay away from the crooks! If you lose your money, it should be to the markets, NOT to broker theft. Carefully research any firm before you open an account. You can check out the firm and the broker at the following phone numbers and websites: National Futures Association. 800-621-3570, www.nfa.futures.org, and the Commodity Futures Trading Commission Office of Proceedings. The main phone is: 202-418-5250, and the "Docket Room" phone number is 202-418-5508. Their website is: www.cftc.gov. Be sure to ask about any complaints, reparations or disciplinary actions against the firm and the specific representative. Even if there have been no actions against the firm or representative, if you hear what you believe are overly-high commission charges.... RUN!! Your order is not filled until it is verified by the broker. Just because you see the price trade through your limit price, that doesn't mean you can start counting your money. As you have seen, there are reasons that an order may not be filled, even if the market moves through your order price. As per the rules of trading, you cannot assume a fill on your order. You must wait until that fill is confirmed by your broker. If you hold your excitement until the order is confirmed filled, you will save yourself a lot of pain, frustration and aggravation. Learn the whole process. If you've been trading since we've started out "Tips" section, then you are far enough along to know that you should be familiar with the whole futures process. For your own good, you should know the order handling process. You have been placing orders for a while, but do you really know what happens to your order when you give it to your rep? Learn the order flow, and you will be more understanding of how, in some cases, it is difficult to get a fill at your price. You will also learn who handles your order, when action is taken on your order and why sometimes, it seemingly take forever to get your fill price. Re-evaluate your financial situation often. Maybe when you started trading a year or two ago, you had the income, net worth, and risk capital to enter this venture. Is that still the case? If you have had the discipline to read and follow these tips, chances are you have been making some profits. If you have, and you have also been taking home some profits, then this tip is not for you... carry on. If however, you have lost money, and have added some along the way, are you still in a position to do so? Things change and sometimes when times get rough, you should also have the discipline to step away from trading if necessary. At times, job (or lack thereof), pressures, or personal pressures could cloud your trading vision. If this happens to you and you continue trading, you will only lose more... remember... "Desperate money always loses". Re-evaluate your mental attitude often. Just as you re-evaluate your financial situation, you should also check on your attitude toward the risks you are taking. Things change in life... I know at this age, I would never take the risks I took when I was younger (and invincible). Same with your trading. Are the losses becoming more personal? Are you getting headaches or other physical effects more often from your trading? If so, you may want to cut back or quit completely. Endangering your mental and physical health is not worth the trading experience. Don't just jump in to start trading when new contracts are being offered. You shouldn't think that you have to be among the first to begin trading a newly offered contract. Wait until others get in and build the liquidity. Without the proper liquidity, you will really pay the price with bad fills because of the volatility. In this case, being first is not always the best. For the new trader, let (and demand) that your representative be your discipline. Remember, you are in a learning phase, and if you have "hooked-up" with a broker you respect, trust, and feel you can work with, then let him or her help you. It's not always easy to admit the trade is wrong, and you should cut the loss. It is also not easy to tell when you have "squeezed" the most profit from a trade. That's why you pay your broker. They should be your discipline. If they are doing their best, listen to them when they tell you to get out of a trade, win or lose. It is difficult to be your own protector. Trick or Treat?. Research your information source. If you trade on fundamental news, be sure that the information you are receiving is from a reliable source. This wasn't so easy to do years ago, but with the internet, you can find any news you need. For the most part, you can trust the info from sources like the Federal Reserve, the USDA, the Exchanges and the various news services and weather sites. You should cross-reference these items too, just to be sure of the news. Before you trade on that "tip" from a friend, check it out! Use that "trailing" stop. I know we talk about stops a lot, but that in itself should tell you something. You are told to "let your profits run", but how far do you let them run... what if they stop and reverse? Use the trailing stop to take you out of the market. This will help you maximize your profits without leaving too much on the table. Example: Using gold again, say you went long at $270. Initially you would place your stop at... say... $263 ($7 risk). Now if gold goes to $275, move your stop to $269 ($6 risk). Then the move is to $280. Get your stop to to $275 ($5 risk) Now take gold to $290. Move the stop to $286 ($4 risk). You get the picture. Eventually, when the price move is over, and the market reverses or even corrects, your stop will take you out with maximum profit. This takes practice, and admittedly it is not simple as my example, but with practice and watching your positions, you'll get the hang of it and will be glad you did! Use only mental stops in option trades. Option traders who use stops always seem to lose. Because of the lower liquidity in many of the options on futures markets, it is possible for a small amount of trades to move the premium prices a great deal. This means if you have a stop-loss on your option premium, it can often be hit quickly, then the premium will often return to its previous price. You know how I preach that you should always use stops, and I will not change my position on that for futures contracts, but for options you must mentally set the amount you are willing to lose on the trade, then if that price is reached, manually take the position off for the loss. Know your trading activity. You are completely responsible for every trade done in your account (non-discretionary), so be as diligent following your trading activity as you are following your individual trades. If you feel there is a discrepancy, contact your rep at once and clear up the mess before it becomes a real problem. My annual (Christmas & Hanukkah) volatility warning. Each year about this time, because of the holidays, the price changes of most futures contracts become very volatile. Many of the heavy traders depart the markets and small amounts of money will cause wild swings in prices. This annual event may be further aggravated by the Y2K scare. Your system may stop functioning properly during this time. Don't rework your system, just take a break and enjoy the holidays. You will have a nice new year before the new millennium, (2000 the last year of the 20th century) to make all kinds of money in normal market trading. Be sure to print or copy all your statements by the end of December. I personally don't believe that Y2K will present much of a problem for the financial institutions, but you should at least be sure to have copies of all your statements just in case. The NFA, NASD and Banking authorities have been very strict on preparations for all their members, but who knows what can go wrong? With the simple act of maintaining copies of all your statements from the brokerages and banks you have accounts with, it affords some protection. If you are a T bond trader, you already know the change. If you are not normally a bond trader, be aware that starting with the March 2000 contract, the yield has been changed to a 6% coupon. When the contract was invented back in the 70's, the coupon rate was 8%. To bring the bond into more reality, the new futures contracts from this time forward will be based on the 6% coupon. Evaluate any political changes before plunging head-long into Y2K trading. There are bound to be many changes in political events before and just after the new year. The ownership change of the Canal, the determination of China to change Taiwan, etc. Take a couple of weeks to evaluate how your system works in a new market with these changes, then begin your trading. Don't be over-anxious. better to miss a few trades than to destroy your account. See you next year. I got nothin' here! Just want to wish you a Happy New Year, and if the world still exists (only kidding), after January 1, we will be back to do our best to help you all in the new year. 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