Futures Trading - Order Types
Now, I am only going to cover the simplest order types for futures trading here, and one or two basic strategies - like any other market I would urge you to start with the smallest type of contract which will be an e-mini specifically designed for new traders to learn how to trade in the futures market. I would suggest you start with some simple stock index futures which is where I started in trading futures. These are simple futures which are used to go long or short on an underlying index, such as the FTSE 100 in the UK or the S & P 500 in the US - they are generally around 1/5th the size of regular contracts. These are widely available through online brokers and will require lower margin deposits and less onerous requirements from your broker. The brokers will also be used to helping answer some of the more basic questions you might need to ask!
Futures Trading - Buy, Sell or Spread Orders
In futures trading there are really only three types of orders that you can enter as follows - the buy order, the sell order or the spread order. Now some order trades will be specified differently depending on whether the trades are electronic or through your broker so please check the order types on your system or with your broker before starting to trade.
- Buy order - you believe prices are going to rise and open the position by buying a futures contract. As a long buyer you have entered into a contract to accept delivery of a commodity at a future date at an agreed price today. If prices rise you close out the position by offsetting the position with a sell order.
- Sell Order - you believe prices are going to fall and open the position by selling a futures contract. As a short seller you have entered into a contract to deliver a commodity at a future date at an agreed price today. If prices fall you close out the position by offsetting the position with a buy order.
- Spread Order - this is a special type of trade which we will look at on the next page, but in essence it involves the simultaneous purchase and sale of two different but related contracts
Futures Trading - Order Entry Types
- limit order - the limit order instructs the broker to fill the order at a particular price or better. If it is a buy limit it is placed below the market price, and if a sell limit then above. Generally you are guaranteed a fill if the market trades through your price.
- market order - orders are filled at the market, at the best price available.
- stop orders - a stop order is an order that becomes a market order if and when the market reaches a designated price. A buy stop is placed above the market and becomes a market order when the commodity trades at, or is bid at or above, the specified price. A sell stop order at a price below the market becomes a market order at or below this price.
- market on close order - an instruction to fill the order at the market, but only in the closing range ( as defined by the exchange)
- market on open order - an order to fill in the opening range of the day ( as defined by the exchange)
- fill or kill order ( FOK) - an order to the broker to fill the order at the specified price or kill the order if it cannot be filled immediately.
- market if touched (MIT) - an MIT order becomes a market order if the price is hit. Just like a limit order a buy MIT order is placed below the current price and a sell MIT order above. However unlike a limit order the market does not need to trade through the price for the order to be filled.
- stop limit order - the stop order becomes a limit order if the stop cannot be filled immediately.
- stop close only order - a stop order that can only be filled in the closing range and will only trigger if the prices have been traded through during the day.
Now there are some other order types such as OCO ( one cancels the other ) and cancel replace, but the above orders are the most common.
Futures Trading - Placing Orders
When you first start trading futures, it can be quite scary placing the orders whether online or by phone. Some brokers still require orders to be placed using the phone, and this is the way I started trading index futures. I would suggest that before you place any orders that you right them down beforehand so that you do not make any mistakes. I used to practice saying - "I'd like to buy 1 FTSE future at the market with a stop loss five points below, good for the day - please can you confirm the order " - in addition of course you will have to give your account details so there is a lot to think about so please write your orders out before you call. These are the points you will need to confirm when calling :
- Name and account number
- Buy or sell order
- Quantity
- Delivery month
- Exchange and contract to be traded
- Price
- Order action type
- Type of order
OK, that's about it on placing orders - let's take a closer look at one trading strategy which is very popular with futures traders, and that's the spread order which I hope will give you some ideas for your futures trading strategies. However I must stress that I suggest you start with very simple orders, just a buy or a sell to start, and perhaps with an index future as I did, or something similar - futures trading can be complicated so keep it as simple as possible when you start!
