Chapter 1-2 Types of Orders and Trade Examples

Futures contracts exist on a wide variety of tradable assets.  Odds are if you can trade it, you can trade futures on it.  The most commonly traded futures are based on commodities, equity indexes, equities, currencies, and interest rates.  This section will detail the different types of futures contracts and their respective characteristics.

Types of Orders

Being familiar with orders and properly placing them is very important to your trading success. With quickly changing market conditions, sometimes every minute can count and knowing the type of order you need to place and placing it accurately can be crucial. Communication is the key. If you have questions about the different types of orders and how to use them, call your broker for assistance.

The Market Order

The most common order, this order initiates the trade at the current market value-taking the bid if trying to sell and the ask price if trying to buy.

The Limit Order

This order initiates the trade at a specific price ‘or better’ if able. For example, buying 1 August Lean Hog at 8202 means the client will be long only at 8202 or less. Traders should note the market may hit the limit price and yet not fill the order.

The Stop Order

This order becomes a market order only when the specified price level is reached. A buy stop is placed above the market and a sell stop is placed below the market.

MIT (Market If Touched)

This order is similar to a stop order in that it is executed only if the price reaches a specified level. The difference is an MIT to sell is placed above the market and an MIT to buy is placed below.

GTC (Good Till Canceled)

These orders, often called open orders, are always considered active orders until filled, canceled, or replaced by another order.

FOK (Fill Or Kill)

These orders are limit orders sent to the pit to be executed immediately or canceled. MOC (Market On Close)These orders are executed within 30-60 seconds of the close and must be within the closing range of prices.

Straight Cancel

This completely eliminates a previously placed order.

Cancel/Replace

This cancels and replaces a previous order by changed the price, type, or quantity. It should be noted that not all exchanges accept all types of orders and individual floor brokers may not accept all types of orders. The types of orders that are accepted are subject to change without notice. Keep in touch with your broker on these changes.

You are ultimately responsible for all orders placed so manage them with a high attention for detail. A log can consist of the date the order was placed, what type of order, buy or sell, quantity, name, price the order was placed, strike price, date you entered the market, price you entered the market, price you exited the market, and profit/loss totals

 

Trade Examples

Going Long

When an investor goes long – that is, enters a contract by agreeing to buy and receive delivery of the underlying at a set price – it means that he or she is trying to profit from an anticipated future price increase.

For example, let’s say that, with an initial margin of $2,000 in June, Joe the speculator buys one September contract of gold at $350 per ounce, for a total of 1,000 ounces or $350,000. By buying in June, Joe is going long, with the expectation that the price of gold will rise by the time the contract expires in September.

By August, the price of gold increases by $2 to $352 per ounce and Joe decides to sell the contract in order to realize a profit. The 1,000 ounce contract would now be worth $352,000 and the profit would be $2,000. Given the very high leverage (remember the initial margin was $2,000), by going long, Joe made a 100% profit!

Of course, the opposite would be true if the price of gold per ounce had fallen by $2. The speculator would have realized a 100% loss. It’s also important to remember that throughout the time that Joe held the contract, the margin may have dropped below the maintenance margin level. He would, therefore, have had to respond to several margin calls, resulting in an even bigger loss or smaller profit.

Going Short

A speculator who goes short – that is, enters into a futures contract by agreeing to sell and deliver the underlying at a set price – is looking to make a profit from declining price levels. By selling high now, the contract can be repurchased in the future at a lower price, thus generating a profit for the speculator.

Let’s say that Sara did some research and came to the conclusion that the price of oil was going to decline over the next six months. She could sell a contract today, in November, at the current higher price, and buy it back within the next six months after the price has declined. This strategy is called going short and is used when speculators take advantage of a declining market.
Suppose that, with an initial margin deposit of $3,000, Sara sold one May crude oil contract (one contract is equivalent to 1,000 barrels) at $25 per barrel, for a total value of $25,000.

By March, the price of oil had reached $20 per barrel and Sara felt it was time to cash in on her profits. As such, she bought back the contract which was valued at $20,000. By going short, Sara made a profit of $5,000! But again, if Sara’s research had not been thorough, and she had made a different decision, her strategy could have ended in a big loss.

 

Questions