To trade efficiently, you need to know the various order types that are at your disposal. Knowing the advantages and disadvantages of certain orders can alleviate headaches down the road. It is also very important to communicate properly with your broker, since a slight slip of the tongue can cost you hundreds or thousands of dollars.

	How to communicate with your broker How to avoid costly errors
	Be familiar with the types of orders you can place

A discount broker wants you to give your order precisely, without any unnecessary chitchat, and then get off the line quickly. Give him the order in the sequence he writes down the information: account number .. buy/sell .. number of contracts .. commodity .. conditions (such as stop, m.i.t.)

Remember, YOU must give the order correctly. A typical mistake made by new traders: When liquidating their short position, they say "sell my short", rather than placing an offsetting buy order. You do this, and you find yourself with twice the short position you had before.

The clerk at the other end does not know whether you are liquidating an old position, or establishing a new position. It is up to you to place the order correctly.

One small tip: to make sure the person on the other phone does not doze off, it's a good idea to repeat buy/sell and number of contracts at the end: "This is Jim Brown, account 12345, buy 5 April Gold at 280.50, BUYING FIVE".

The majority of errors take place when your attention wonders, while you are giving the order. The modern trader sits in front of his computer screen and watches several markets simultaneously. It is easy to make a mistake when you place an order , while you are watching your other position being shot down in flames.

To avoid this very dangerous situation, do the following: write down your order on paper and check it for accuracy (you probably keep some kind of log anyway. If you don't, you should!). Then, call your broker. While you are on the phone, do NOT look at the computer screen! Read the order to him, and think about what you are saying while you speak. Then, give TOTAL attention to his read-back (many errors happen, because the trader relaxes after having dictated the order).

Another common mistake is to forget "good till cancelled" orders. When you liquidate a position, remember to remove the open stop-loss order you placed a few days ago. Your full-service broker will do this for you without being reminded, your discount broker will not. Getting an unexpected fill a few days later can add much unwanted excitement to your life!

Working with a full-service broker is distinctly different. A full service brokers usually knows your position and will be able to catch many of your mistakes. When you call him, you will not just place an order. You will discuss your ideas and get some feedback from him. By the time you get ready to place the order, you can give the order in plain English, and he will know how to write it up. Liquidating your short position will then sound somewhat like "get out of my short ...", or "liquidate at ...". Any errors arising from such a conversation would be the broker's problem.

Discuss with your full-service broker whether you want all stop loss orders to be "good till canceled". Don't assume that they are. You should also give him standing instructions to cancel those orders without further communication, once the position is liquidated through other means.

Complex orders are commonly accepted by most full-service brokers, but not by discount firms. Use this to your advantage!

For example: "Follow the soybeans with a 4 cts trailing stop". This will require the broker to pay extra attention to your position, and he will tell you whether he can do it or not. If he does accept such an order, it will relieve you from the duty of watching the markets on a minute by minute basis, and it will eliminate a lot of phone calls. Even more esoteric would be an order such as "if March Soybeans touch 600, liquidate my July call options". Again, he will tell you whether he has the time to help you or not.

Whether you are with a discount broker or a full-service broker, it is a good idea to ask for a review of all open positions and all open orders at regular intervals. If there are any discrepancies, it is always best to discover them as early as possible.

Always remember that one moment of sloppiness can wipe out several profitable trades! YOU play a major part in avoiding costly mistakes!

Limit Order
If you like to place your orders early. before the market reaches the level of your desired entry point, you use a "limit order". Example: Gold is trading at 290, and you want to buy when it reaches 285, your order is to "buy at 285". (the reverse applies for sell orders). Sometimes, it touches your price and then bounces back up. It is important to remember that you are not guaranteed a fill, just because it touched your price once, or even a few times, before bouncing back up. There could have been a number of buy orders at the same price, with only a limited supply of contracts for sale, and yours was not filled.

A limit order can also be used in place or a market order, when you don't want to live with the uncertainty of a market-order fill. Example: The S&P is trading actively between 1122 and 1124. You want to buy, but worry about getting filled at the upper end of the current trading range. Instead of buying at the market, you decide to place an order to buy at 1123. This will assure you of a fill not higher than 1123, and possibly a better fill. However, if the market now starts moving up, you may be left behind without a fill! You decide, if you rather have the uncertainty of a possible bad price or the uncertainty of being left behind!

The reverse applies for sell orders.

Stop Order
Stop orders can be used for three purposes:
a. to minimize a loss on a long or short position,
b. to protect a profit on an existing long or short position, or
c. to initiate a new long or short position.

A buy stop order is placed above the market and a sell stop order is placed below the market. Once the stop price is touched, the order becomes a market order and will be filled like a market order.

Example: a) Gold is trading at 290, and you want to sell when drops to 285. Your order reads "sell 1 December Gold at 285 stop". Your order will rest within the system, until prices reach 285. At that moment, your order becomes a market order to sell. b) Gold is trading at 290 and you want to buy when and if it moves up to 295. Your order reads "buy 1 Dec Gold at 295 stop".

Since this an order to sell "at the market" while prices are dropping, or to buy "at the market" while prices are rising, it is quite likely to receive fills that are beyond your specified stop level. Be prepared for some "slippage". An even worse situation can happen when you have a stop order in the system before the market opens. A news event could cause a gap in prices, far beyond our stop order. Your order will still be executed "at the market", as before, even though the transaction price may be far beyond your desired stop level.

There is a variation of the stop order: the stop limit order. It combines the features of the stop order with those of a limit order. Example: Gold is trading at 290, and you want to sell when it drops to 285, but you are worried about slippage in a quickly dropping market. You can place an order that reads: "sell at 285 stop, 284.50 limit". This order is activated when the first trade takes place at 285, and turns into a limit order to sell at 284.50 or better. (use the reverse for a stop-buy limit order). The obvious danger with this kind of an order is to be unfilled in a fast moving market. Prices can drop through your stop level (285) so quickly that the next trade after 285 is 284. In this case, your order will not be filled, until prices climb back over 284.50 at a later time.

Market-if-touched (m.i.t.) Order
The m.i.t. order is similar in nature to the stop order: When it touches the specified price, the order turns into a market order. This order is used to avoid receiving an "unable" on your limit order.

Example: a) Gold is trading at 290, and you want to buy gold, when it reaches 285. You could place a limit order to buy at 285, but you are worried about it touching this price without your order being filled. You place an order to "buy at 285 m.i.t.". When Gold prices drop to the desired level, this order will become an order to buy at the market after the first trade takes place at 285. Since your order is now a market order, it can be filled at a price other than 285. b) Gold is trading at 290, and you want to sell when it reaches 295. Your order reads "sell at 295 m.i.t.".

Or-better Order
This order is of importance to you only if you trade with a discount firm. It is used in the following situation:

Gold is trading at 290, and you like to buy at the market, but worry about getting filled at a higher price. You place a limit order, instead of a market order as follows "buy at 290.50". This limits the fill you might receive to 290.50. The floor broker who executes your order will understand what you are trying to achieve. Now, there is a problem that could possibly arise: what if you move your limit even further away, such as 291, or 292, or 293. There comes a point, when the floor broker no longer executes this order as a limit order. He may suspect that the order was given in error, and that it was meant to be an order to "buy at 293 stop". He will then reject the order. How much room will he allow before calling it an error? That depends on the market and the volatility of that day.

To avoid this problem, you should make the order read "buy Dec Gold at 293 or better".

If you have an account with a full-service broker, you don't have to be concerned with this issue. Your broker will automatically chose the right form of order.

Close-only Order
Limit orders, stop orders and market orders can be made to be executed at the closing only. This is for importance to those traders who work with systems that place emphasis on the closing price. Please remember, that the price at the closing could be far beyond your stop-level and result in a rather unpleasant transaction price.

The various exchanges have different time windows allowing the transaction of on-close orders.

One-cancels-the-other (o.c.o.) Order
This is a combination of two orders written on one order ticket. This instructs our floor personnel that once one side of the order is filled, the remaining side of the order should be cancelled. By placing both instructions on one order, rather than two separate tickets, the customer eliminates the possibility of a double fill. (This order is not acceptable on all exchanges.)

Spread Order
You may wish to take a simultaneous long and short position in an attempt to profit via the price differential or "spread" between two prices. A spread can be established between different months of the same commodity, between related commodities or between the same or related commodities traded on two different exchanges. A spread order can be entered at the market or you can designate that you wish to be filled when the price difference between the commodities reaches a certain point (or premium). For example: "Buy 1 June Cattle, sell 1 August Cattle at 100 to the sell side".

The spread broker on the exchange has great leeway to ensure he can obtain prices required by limits. He cannot be held to any price differentials which seem to appear on quotation equipment!

Trailing Stop Order
If you have an account with a discount firm, move on to the next order type, because your discount broker will not accept such an order. A full-service broker will! Example: You have long position in Gold from 290 and prices are moving higher. You are worried about the market reversing and losing your profits in this position. You can ask your broker to place a trailing stop of 2 dollar on your position. This means, if the current high price of gold is 295, he will place a stop-sell order at 293. The broker will, without further communication, raise this stop order, as new highs are being made, thus assuring you a sale when the market reverses more than 2 dollars. Remember, this is a voluntary service the broker offers. Don't hold him liable, if he gets too busy and misses the requested order change. Ask your broker if he can do this for you. He will tell you, whether he can or not.

Contingent Order
Again, you don't need to read this if you work with a discount broker, as he will for sure not accept such orders. When you work with a full-service broker, you should consider him part of your team. Take full advantage of this! Unlike a discount broker, he will watch your position, and most likely accept a variety of conditional orders that would be unacceptable with a discount firm.

Example: a) "when January Beans reach 600, sell my March call". b) When December Cattle trades at 62.00, sell my February Cattle at the market

Such orders are conventional, but your full-service broker may be willing to accept them. Ask him about it, and he will tell you whether he can do it for you or not.

Copyright, 1996, Freeman & Co.

Freeman & Co.
5121 Westpark Dr., #101
Valley Village
CA 91601
USA
Telephone: (818) 980-9751
(800) 427-5550
FAX: (818) 980-9653
e-mail: manager@betterfutures.com

PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH TRADING DERIVATIVES CONTRACTS, FUTURES AND OPTIONS. TRADING IS NOT SUITABLE FOR ALL INVESTORS. PLEASE CAREFULLY CONSIDER YOUR FINANCIAL CONDITION BEFORE INVESTING IN FUTURES AND OPTIONS CONTRACTS.