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Common Types of Orders: Market, Stop and Limit
By: Rick Thachuk   Wednesday, August 8, 2007 10:47 PM
A limit order to sell is only executed if the market price rises to the limit price.

The Stop Order:

A stop order, like a limit order, is only executed once a specific price is reached, but the motivation for the transaction is different. Whereas the limit order is typically used to enter into a futures position at a specific price, a stop order is mostly used to exit or close a futures position at a specific price. Stop orders can be used to close a position in the event that prices move adversely and the position loses money, and are hence regarded as a useful risk management tool. A stop order to buy has a price that is above the market price and would be used by a customer who has established a short futures position. If prices rise so that loss accrues on the customer's short position, then the stop order provides a limit to the loss - as soon as prices rise to the stop price, the order is executed as a market order. For instance, with September Canadian dollar futures at $.7225, a customer who sells 3 futures might enter a stop order to buy 3 September Canadian dollar futures at $.7260. If prices rise to the stop price so that the customer is losing money, the stop order will be executed and futures contracts will be purchased. By so doing, the original short position is offset or closed out, thereby preventing any more loss.

Similarly, a stop order to sell has a price that is below the market price and would be used by a customer who has previously established a long futures position. If prices fall so that loss accrues on the customer's long position, then the stop order provides a limit to the loss - as soon as the market price falls to the stop price, the order is executed, thereby closing the initial long position. For instance, with September Canadian dollar futures at $.7225, a customer who buys 2 futures might enter a stop order to sell 2 September Canadian dollar futures at $.7185. If prices fall to the stop price so that the customer is losing money, the stop order will be executed and futures contracts will be sold. By so doing, the original long position is offset or closed out, thereby preventing any more loss.

Stop orders do not guarantee that the loss on a futures position will be confined to the stop price. Prices may continue to move adversely as the stop order is being executed resulting in larger loss than anticipated. This is referred to as slippage and should be taken into account when using stop orders as a risk management tool.

In the examples above, stop orders were used to protect a position previously established. Stop orders can also be used to initiate a new position. If prices are trading in a range and you wish to buy if prices rise to a certain point (that is, break out of the range on the upside), then you would use a stop order to buy. Recall that a stop order to buy has a price that is above the market price. Similarly, if you wish to sell on a break-out to the downside, you would place a stop order to sell.

It may be helpful to remember this distinguishing feature between limit orders and stop orders: A limit order to buy has a price that is below the market price while a stop order to buy has a price that is above the market price, and a limit order to sell has a price that is above the market price while a stop order to sell has a price that is below the market price.

Other Types of Orders: The Market on Close (MOC) order is a market order which can only be filled within the closing range. (The closing range is officially determined by the respective commodity exchange.) Similarly, the Market on Open (MOO) order is a market order which can only be filled within the opening range. These orders are used by professional traders who believe that the opening and closing range of a market are more liquid and provide a more accurate indicator of value than intraday prices.


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