Guest post by Randall Liss – You Give The Orders

Today’s post is by a new guest blogger, Randall Liss. Randall is an educator who specializes in options trading.

You Give The Orders

I’m posting late today because I have a new advertiser (see right column) and we had to get the ad up. The ad is for an excellent trading platform and I recommend taking a look, particularly if you trade professionally. I was gratified that a few people emailed me this morning wondering where today’s missive was. Quite flattering.

Tomorrow there will be no column as it’s Rosh Hashanah and I don’t work on the High Holidays. And now, without further ado…

am a firm believer in the power of all of you as individuals to make sound investment choices. Mutual funds and fund managers have a mixed bag of results and I promise, having met many of them, these managers are no smarter than you are. Proper financial education is your key to controlling your own financial destiny. And proper education, with an emphasis on options, is what I’m all about.

Which leads to today’s topic: Types of orders. If you are going to place your own orders (and why not?) then an overview of types of orders is fitting and proper.

Limit Order: This means that the price at which you wish to trade is fixed. If the market never hits that price the order remains unfilled and you do nothing. And there’s nothing wrong with that! Trade at your price or don’t trade at all. The alternative is the:

Market Order: This order is executed instantly at the best price available at that moment. But you have no idea exactly what price that will be. In a highly fluctuating market your execution price (your “fill” as it’s called) could be far away from what you expect. For this reason I do not believe market orders are a prudent way to trade. I prefer limit orders.

Stop Loss Order: This is a good safeguard to have as its intent is to stop your loss. Say you buy an asset at 9. You place a stop loss at 8. Meaning that if the price drops to 8 you immediately have placed a sell order to limit your loss to 1. A stop loss can also be used to safeguard a profit. This sort of order is called a Trailing Stop. Take our previous example, you buy at 9 with a one point trailing stop. If the price moves to 11 your stop loss order now kicks in if the price drops back to 10. The price goes to 17, your stop order kicks in at 16 and so on. Bear in mind, though, that when a stop loss is triggered it turns into a market order. Meaning that you might not get filled at your stop price
but perhaps much worse. Which is why I prefer the:

Stop Limit Order: Take our previous example, you buy at 9 with a one point stop limit. Now if the stop is triggered your order becomes a sell order with a limit price of 8. You won’t get filled at a random price. The danger being that if the market really runs away from you your stop loss might not get filled. I still prefer a stop limit as opposed to a pure stop loss.

Day Order: This means that your limit order will automatically be cancelled if not filled by the end of the trading session. This is a good way to place an order because it mitigates overnight risk. You also don’t have to constantly monitor this order or even remember that you placed it. As opposed to the:

GTC Order: Which is an acronym for Good Til Cancelled. This order remains in force until you take an active role in cancelling it. For that reason, I don’t like GTC orders. I’d rather start every day fresh with no orders outstanding.

So, even if you don’t wish to be this pro-active and have an asset manager that you trust, ask him/her about how they place orders and what sorts of orders they place.

Remember! You are the Boss! Your destiny is in your hands. And Education is Key!

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