Commodity Trading Basics: Types of Orders (Part One)

I know it’s been a while since I’ve posted anything here at Commodity Trading Information, and I didn’t want anyone to think that I had fallen off the face of the earth…I have been VERY busy as of late, and one unfortunate “side casualty” has been the neglect of this blog as a result. The cool thing is that I have set aside some time today to post a little about some commodity trading basics, namely the types of orders that you can use to actually place a trade. Understanding the process of placing an order for a trade is a vital element that you have to have in place to be ready to handle the markets. Different orders apply to different situations and “market moods”, but as you gain experience in commodity trading, you’ll find that there are certain order types that you become comfortable using, and after a while you won’t even have to think about what type of order you’ll want to place anymore, it will basically be second nature to you after a while. Me personally, I know that I will always use limit orders, simply because they’re the most efficient order type to use when you’re concerned about conserving capital and not being too “loose” with your trade management. But before I get ahead of myself, let me run through the different order types for you so that you can get a good grasp on what they are and their functions:

Market orders are by far the most common type of order used in commodity futures trading, primarily because of what I call the “convenience factor”—with a market order, it’s very rare that you’ll have a hard time entering a trade, unless the market is extremely violent (i.e., limit moves, which we’ll have to cover in another post). When you place an order to enter a trade, and you are actually able to get into that market, it is known as having your order “filled”. This simply means that you find a seller that’s willing to sell you their futures contract at the price determined by the type of order placed. In the case of the market order, this price can vary greatly…but instead of talking in more abstract terms, let me give you an example. Let’s say you want to enter July Corn…which, now that I’m thinking about it, I need to do a post explaining the actual futures contract and why there are different months for each contract. As a matter of fact, there are a ton of things that are coming to mind now that I’m really thinking about it. I was hoping to really keep things in order and explain the basics of commodity trading in a step-by-step way, but honestly, I don’t see myself sticking to a strict sequential order. I’m pretty sure that at the end of it all, I will cover everything that needs to be covered, but I don’t expect it to be in a perfect chronological order or anything like that. So, hopefully all will be said that needs to be said when it’s all said & done. Anyway, back to the market order. Basically, a market order gives you the right to enter the market at the “going rate”…in other words, with a market order, you don’t have a specific price in mind, you’re just trying to get into the market as soon as possible. I like to call market orders the “impatient person’s order”, because it definitely will get you into the market usually in no time flat. The whole point of placing a market order is that you want immediate execution, you want to be in the market ASAP, and the price is secondary to just getting into the market. The deal with a market order, according to the official definition anyway, is that your order is filled at the “prevailing market price”, which is extremely subjective. What most people don’t realize when they’re placing market orders, ESPECIALLY in markets that are not extremely liquid (i.e., low open interest—yet another post topic), they’re likely to get pimped by unscrupulous floor traders. On days when there is a very wide trading range, for example a 10-cent trading range in Corn, your chance of getting filled at a decent price are greatly reduced when you place market orders. They’ll basically scalp your order to pocket some quick profit in a fast-moving market and then blame your crappy fill on that same “fast market”. Since you cannot designate a specified price that you want to enter/exit a trade when you use a market order, you’re subject to whatever the floor brokers think is the best price for you to enter/exit the market at. This can pose a real problem because of the obvious conflict of interest, especially when they have a chance to make a quick buck (or $500 bucks on a day with a wide trading range). I have placed market orders before (in my days of ignorance), and to my chagrin, I would see my fill price being the day’s high if I was long, or the day’s low if I was short. It leaves you with that sour feeling in your stomach, I’ll tell you that.

Now some people would argue that you’re being too “nit-picky” by using limit orders (probably the subject of the next post), and that you may miss out on getting filled by using limit orders instead of market orders, and then consequently missing a huge move because you were being “penny wise and pound foolish”, by missing an entry into a fast moving market due to using a limit order. But the bottom line is, I would rather take my chances and have a much more controllable trading process than being “at the mercy of the markets” as far as entry/exit price is concerned. So my advice to any newcomer to the markets: Use LIMIT orders, and not market orders. Once you gain a little more experience in learning when market orders are appropriate, it’s much better to be more conservative and controlled in your trading style, and this cannot be fully accomplished with using just market orders.

Wow…this post is long as crap! I’m signing off, but I hope that this discussion of market orders has helped you grasp these commodity trading basics just a little better.