Custom Search

The Importance of Orders

Praise the Lord and pass the ammunition.

lt. cmdr forgy at pearl harbor

To the day trader (in fact to all traders), using the right price order is just as important as using the right tool is to the mechanic or carpenter. Using the right orders can spell the difference between profits and losses. Using a market order when a stop or stop limit order should have been used may result in a poor price fill that will cost you dollars. Since the bottom line is very important to day traders, perhaps more important than to any other type of trader other than a scalper (who is also a day trader), every tick saved is indeed a tick earned. Orders should be specifically geared to what you seek to achieve in terms of timing your trading system. Orders are designed to save you money, not to lose you money. They will help you reduce bad fills and avoid lost points or price skids. But to use price orders to your advantage, you must be familiar with the various types of orders and when they are best used. You must also know what orders to avoid and when to avoid them.

What You Should Know about Market Orders

Market orders must be avoided whenever possible. A market order is, as far as I'm concerned, a license to steal. Rarely will a market order be filled at the exact price you are expecting. Typically, a market order will cost you one tick, at times two or three. In S&P futures, a market order may cost you much more than just a few ticks, although one or two ticks in a quiet market is not unusual. If you lose two ticks on entry and two ticks on exit, the cost per trade will most assuredly add up. However, not using market orders will cause you to risk not getting a position at all or not being able to exit a position at all. Here are some guidelines for using market orders:

ж Only use a market order when absolutely necessary. If you are using an intraday oscillator-type signal that enters at the end of a given time segment, then a market order is acceptable. If, however, you can use a specific price order as opposed to a market order, this is preferable. It is not uncommon for markets to make a quick move following a signal, but very often the market returns to its original entry price fairly soon, and a price order would have been sufficient. You can save a great deal of money this way.

ж If you are riding a fairly large profit and wish to exit a position quickly because your indicators have turned, then it is worth giving some of the profit back just to make sure you are out of your position.

ж Avoid market-on-close (MOC) orders. All too often such orders are even more of a license to steal, since they can be filled at almost any price during the last minute of trading. An MOC order in thin markets is a certain invitation to trouble. Many traders jokingly refer to MOCs as "murder-on-close" orders, since fills are often so poor.

ж Never use market orders with spreads. You are far better off using specific spread levels for entry and exit, or you may use specific price orders in each market individually to "leg" into or out of the spread. Considerable slippage is the rule in spread market orders. Unfortunately, the only orders you can use in spreads are market orders or price orders. Of the two types, price orders are clearly preferable.