Chapter 2-1 General Trading Information
Types of Orders
There are many types of orders a trader has at his or her disposal when executing a trade. A trader needs to understand the advantages and disadvantages when using each type of order, as using the wrong type may cause avoidable losses. The most popular types of orders are market, limit, and stop orders.
Market Order – A market order is a buy or sell order that is executed immediately at current market prices. A market order is guaranteed to be filled. However, in fast moving markets the price paid or received may not be the price quoted. Additionally, a market order for a large number of shares may result in different prices for some of the shares. In short, be wary of using market orders on stocks with a low average daily volume or stocks that are moving quickly such as stocks in the news. Marketing into or out of such stocks could result in a fill or multiple fills much further away from the market you originally identified. It is much safer to use a market order on high-volume stocks and stocks whose technical moves are not based on newsworthy events.
Limit Order – This type of order allows you to put a restriction on what price you are willing to buy for or sell at. When a limit order is placed it will be executed at that particular price or better, otherwise not at all. When a limit order is placed and not executed due to the limit being outside the quote price, the order stays as an open order waiting to be filled unless cancelled.
Stop Orders – A stop order is a market order to buy or sell a stock once the price of the stock reaches a specified price, known as the stop price. Stop orders are sent to the exchange and are placed hidden as part of the exchange’s order flow. When the specified price is reached or breached, your stop order becomes a market order.
Trailing Stop Orders – Work in a similar way as Stop Orders, however, they are designed to trail the prevailing price trend. Trailing stops (or T-Stops) are beneficial to those who do not or can not monitor their positions actively. To place a trailing stop you set a predetermined price in which you wish the stop to trail the stock price, as well as an interval for when the stop is to adjust in price. For example, if you purchase a stock at $32.50 and place a 7 cent trailing stop that adjusts every 15 cents; then every 15 cents the stock appreciates from your entry point, the T-stop will be 7 cents below (stop would be at $32.58 if price ascends to $32.65, and will not adjust until price ascends to $32.80 or higher).
Buy Stop Order — Traders typically use a stop order when buying stock to limit a loss or protect a profit on short sales. The order is entered at a stop price that is always above the current market price.
Sell Stop Order — A sell stop order helps traders to avoid further losses or to protect a profit that exists if a stock price continues to drop. A stop order to sell is always placed below the current market price.
The advantage of a stop order is you do not have to actively monitor how a stock is performing on an intraday basis. The disadvantage is that the stop price could be activated by a short-term fluctuation in a stock’s price. Also, once your stop price is reached, your stop order becomes a market order and the price you receive may be much different from the stop price, especially in a fast-moving market where stock prices can change rapidly.
NYSE Limit Order Book (Open Book)
The limit order book contains all the limit orders placed through the NYSE. Only orders that are 100 shares or greater, in lots of 100, will appear on the book. The limit order book constantly refreshes as the limit orders are placed, filled, or cancelled. Keep in mind that the limit order book does not represent the entirety of orders in a single stock, but just limit orders sent electronically to the NYSE. Such orders as market orders, stop orders, crowd, and ECNs are not represented on the NYSE limit order book.
Understanding the Tape
By understanding the consolidated tape you can begin to get a good feel for market direction. Being able to see the prints and recognizing them for what they are is a crucial first step in achieving trading success. Although prints that appear on the consolidated tape are in fact a snapshot of historical data they can also lend insight into future market events both short and long term.
Recognizing a Strong/Weak Print
How do you recognize a strong or weak print that could indicate a potential bull or bear move? Important to note here; don’t over think the market. If it looks, acts, and sounds like a duck, it’s a duck. Let’s look at an example:
If shares come into the limit order book to pay $0.10 above the current market price, clearly, the buyer is motivated. Why would you pay more for something if you didn’t have to? Try to put yourself in the position of the buyer and think of all of existing conditions that would make him/her behave in such a fashion. What happens next should make clear your course of action or either reinforce or rebuke your strategy already in progress. Though there are many caveats, where this new aggressive better bid on the limit book is printed should indicate the overall strength or weakness of the stock.
In our example, the current market is $46.10 to $46.12 and the last print was on the offer, an up-tick, at $46.12. 5,000 shares come in to pay $46.17. A bullish move would be to print out the balance of the offer at $46.12 and any other shares that may be on the open book between $46.12 and $46.17 only to post the balance of the shares on the new bid of $46.17. A bearish print would be to print the entirety of the shares on the bid at $46.10 leaving no support. There are other possible ways to print the shares that could fall in between either of these two extreme scenarios and they all would indicate different levels of strength or weakness. It just takes time and practice to get to a point where you can comfortably and consistently identify and utilize each.
Being able to logically decipher what constitutes a weak or strong print is, very simply, a matter of recognizing liquidity and is something that will come to you in no time at all. You will find that the concepts are quite simple, but that your application of the concepts requires your diligent effort and unceasing desire to improve yourself as a trader.
Clean up Prints on a Bull Move
Also known as an exhaustion print, clean up prints on bull moves generally manifest themselves when a break out develops into an almost vertical lift. Look for gaps and large volume prints. This is especially easy to identify when there is a large sized bid stepping up.
If during an aggressive bull move a bid steps up to the current offer or better and large prints, possibly gap prints, follow then the move has been exhausted and the buyers are “cleaned up” or eliminated.
These prints can occur on either the bid or offer side of the quote. Whether or not the print(s) occur on the bid or offer is a direct result of liquidity. Keep in mind that where a stock finds its liquidity and the manner in which the stock reflects the quote thereafter in relation to the most recent size prints will directly affect the voracity of the counter trend move which will most likely ensue.
Clean up Prints on a Bear Move
Clean up prints on bear moves work in the same fashion as its counterpart, clean up prints on bull moves, only inverted. Though stock may be moving in a different direction the fundamentals driving market conditions are constant.
The only distinction is that there are two types of sellers that can show on the offer side of the quote, and a stock’s counter trend move or bounce may differ depending upon which seller is represented.
The long seller is one who already owns the stock outright and is now exiting that long position.
The short seller is borrowing the stock and is entering a short position basically profiting only if the position proceeds downward.
What is important to note about clean up prints on a weak move is a simple matter of understanding market dynamics. Stocks do not go down because there are more orders on the sell side of the market or because a short seller is following the prints down. Although those conditions may be the reason a trader may chose to sell, ultimately, a stock goes down because somebody is simply willing to sell it for less than it is currently trading. Understanding this simple, yet subtle distinction will be the difference between trading very well and trading well enough.
Typical Advanced Trading Platform Screen
Level II with Order Entry
NYSE Time and Sales (also known as the Tape)
NYSE Limit Open Book