Learn How to Place an Order | Trade Futures
The aspect of the Merril Lynch training program I enjoyed the least back in 1960 was the section devoted to correct entry of orders. It seemed like we spent hours on the technicalities of entering all manner of orders and then practicing them over and over – from the point of view of the client, the account executive, the order clerk and the executing floor broker.
Shortly after “graduating” from the training program and being assigned as an account executive in one of Merril Lynch’s midtown Manhattan offices, I realized how important and necessary this subject is. I silently thanked whoever had the good sense to include such rigorous coverage in the training program.
Over the intervening years, I have been dismayed at how little most speculators really know about order entry procedures. Surprisingly, that includes experienced professionals who ought to know better.
You should be totally proficient in entering orders and receiving confirmations for two reasons:
Incorrect or faulty order entry procedure can result in very costly errors. Brokerage firms invariably record all order conversations and, in the event of a disputed error, will play the tape back. If you made the error, you pay to fix or undo it. It’s as simple as that. And, as the saying goes, ignorance of the law (or of the correct procedure) is no excuse. Besides, even if the order clerk commits the error – and he or she may be at fault – if you are sharp enough to catch it before it becomes expensive to fix, you’ll have scored some points with the firm and made some valuable friends.
Knowing correct entry procedures for all types of orders facilitates your trading and allows you the flexibility of a variety of tactical plays that are available to you but denied to traders who know just the basic “meat and potato” type of orders. Whatever the order, be sure to speak slowly and distinctly. Concentrate on your order and on what you are actually saying. Many errors have been made by people wanting to sell, for example, but being diverted and reading the word “buy” on another ticket on their desk and mistakenly entering it as a buy. Furthermore, it is imperative that the account executive or order clerk repeat the order back to you. There can be no exception to this! What if the order clerk takes your order and hangs up without repeating it? Call him right back and politely ask him to repeat the order. Incidentally, when he calls you back with your fill, you should also repeat it back to him.
Here are the components that make up all orders:
2. Buy or sell
The first stage of any order is to buy or sell. Always repeat this part of the order – “Buy 10 May soybeans at the market. Buy it.” It may sound superfluous and wordy, but it helps assure that the party at the other end clearly knows whether you want to buy or sell.
Futures trades are specified in number of contracts.
4. Delivery Month
Make clear which contract month you want to trade, such as “May corn,” “July wheat” or “December cocoa.” “July wheat” or “December cocoa” You will sometimes hear more euphemistic references such as “Labor Day” for September and “Christmas” for December, the theory being that it eliminates confusion in two similar-sounding months. In a quick order entry, September and December copper may sound alike, but there’s obviously no confusion between Labor Day and Christmas.
This may seem pretty straightforward. To eliminate some of the ambiguity in sound between cotton and copper, you may hear them referred to as cotton thread and copper wire. One other point: when the commodity is actively traded on more than one exchange, you should specify the exchange. For example, when I enter a gold order, I always specify COMEX gold because I trade gold at New York’s Commodity Exchange Inc.
Price can have a number of variables. In its basic form, you specify at the market or a particular price. At the market or a market order is exactly what it sounds like: the broker fills your order at the best price he can as quickly as he can.You should not have any illusions about the floor broker watching the market and waiting around to get you a better fill. His job is to fill the order and get the report back to you as quickly and as accurately as possible.
Under normal circumstances, he will buy at the “bid” or sell at the “offer.” If you want to give the broker some discretion in the timing of filling your market order, you can enter it on a “not held” (or “take your time” or “disregard tape”) basis.
For example, your order could be entered as “Sell 50 March sugar at the market, not held.” This type of designation is usually entered with larger orders where you may not necessarily want to buy at the bid or sell at the offer, especially if the market is thin. With such large orders it helps to talk with the broker beforehand (outside of trading hours preferably) so you both understand each other.
With a limit order, you are not willing to buy at the bid or sell at the offer. Instead, you specify your price limits above which you will not buy or below which you will not sell. A limit order to buy will be priced below the current market; a limit order to sell will be priced above the market. It is not necessary to accompany a limit order with the designation “or better.” All limit orders are understood to be or better – that is, the broker will always try to get a better price for you if he can.
The stop order, in its basic terms, is an order to buy if the price hits a specified level above the market and an order to sell if the price hits a specified level below the market. Let’s say the trend in sugar is up, and you are long three contracts of March sugar from lower levels. The current price is 7.11 per lb., and you want to add to your long position only if the market can surpass the 7.20 level against which it has failed on several occasions. In that case, you might order the following order: “Buy two March sugar at 7.23 stop.” If the market does rally through your stop point, it doesn’t assure you of a stop at 7.23. Strictly defined, a buy stop becomes an order to buy at the market if the price trades at or through your stop price or is bid at or through your stop price.The point is: You do not need an actual trade to elect your stop. A bid at or above your stop price will elect your stop to make it a market order.
A sell stop, on the other hand, is a resting order to sell below the market. It becomes a market order if the price trades at or below your stop price or if the market is offered at or below your stop. In volatile markets, especially if there is an accumulation of stops at or around a particular price, it’s not unusual for stop orders to be filled beyond (at a worse price than) the specified stop price.
As an alternative to a straight stop order, you can enter a stop-limit order. (Check with your broker, some brokers or exchanges will not accept such orders.) Whereas a stop order becomes a market order if the stop is elected, a stop-limit order becomes a limit order if its stop is elected. This has both an advantage and a disadvantage. It insures that you do not get filled at worse than your limit price. On the other hand, you may miss being filled if the market moves beyond your limit before the floor broker can fill you.
A fill or kill (FOK) order must be filled immediately when it gets to the floor. If the broker is unable to fill it immediately, it is canceled. He reports back to you that he was unable and the order is out. One cancels the other (OCO) involves two related orders; whichever order is filled first, the other is canceled. For example, if March sugar is trading at 7.11, you might say, “Buy two March sugar at 7.20 stop or sell two March sugar at 7.10 stop, one cancels the other.” Market if touched (MIT) is a limit order that becomes a market order if your MIT price is touched. For example, say May soybeans are trading at $5.49 per bu., and you want to go long if the price gets down to $5.42. You don’t want to risk missing the market on a tick at $5.42 followed by an upward bounce. Your order would read, “Buy 10 May soybeans at 5.42, market if touched.”
You use or better in an order only when your are entering a limit-buy order above the market or a limit-sell order below the market. As an example, let’s say you want to buy May soybeans in a strong rally. The last sale is $5.49, and you would be willing to pay as high as $5.51 but no higher. If your order reads, “Buy 30 May soybeans at 551,” the normal way you would order a limit order, there is a good chance the order clerk or floor broker will question the order. They would likely come back to you with, “Your buy limit is .01 (or .02) above the market. Are you sure you didn’t want to sell?” Then you are obliged to go into a long explanation that you know your buy limit is above the market because it was rallying, and you didn’t want to miss the market – a tedious and time-consuming delay.
Instead, just enter your order as “Buy 30 May soybeans at 5.52 or better.” That tells everyone involved that it is a buy order and that the above-market price is correct (and vice versa for an or better sell order). When done is a contingent order that says, in effect, “After you have filled this order, please enter the following order.” For example, “Buy 10 May soybeans at 5.45; when done, enter an open stop at 5.35”. A short form of the same order would be, “Buy 10 May soybeans at 5.45, EOS 5.35”, where the EOS stands for “enter open Stop”.
Another example is, “Sell 5 July wheat at the market, EDS lQ,” where the EDS stands for “enter day stop.” In this case, the broker (if he is willing to accept the order) is responsible for entering the buy stop. 10 above whatever price the order was filled.
7. Time duration
Unless you specify otherwise, all orders are understood to be day orders – that is, if an order has not been filled during that session, it expires. If you want an order to remain in force beyond the day of entry, you must specify this when you enter it. You can enter a good ’til canceled (open) order, which means just what it sounds like, it remains in force until it is either filled or canceled. Alternatively, your order can be good through a specified date, and you must specify the date. Examples are, “Buy 10 May corn at 1.86, good ’til canceled,” or “Sell two March sugar at 7.60, good through Sept. 30.”
In all open or good through a specified date orders, you are responsible for canceling them when required, such as when you liquidate the position with another order and still have the previous order in force.
A straddle order, also called a spread or switch, is quite a common order. The term refers to the simultaneous purchase and sale of two delivery months of the same commodity or delivery months of two different, but related commodities.
There are three basic reasons for such orders:
You are taking a speculative position based on an analysis that one “leg” of the straddle (your buy side) will advance relative to the other leg (your sell side).
You are in a position which may be coming toward delivery, and you want to “roll” it forward into a more distant futures contract.
The third and, regrettably, quite common straddle tactic is to straddle a losing position rather than liquidating it. This is a distinctly bad idea. It just compounds your problem and adds to the loss. My advice on this is direct: Don’t do it!
When entering a straddle order, it’s advisable to preface your conversation with, “I have a straddle order for you.” You normally enter the buy side first, and you must specify it to be either a market or a limit order.
Here are some examples:
“Buy 10 May corn and sell 10 March corn, at the market”; “Buy 10 May corn and sell 10 March corn, may .04over, ” or “Buy two May gold and sell two May silver on COMEX, at the market.” You can also use not held (take your time or disregard tape) orders when entering straddles, and the floor broker will work accordingly.
One final suggestion when shifting a position forward: Unless you are an experienced operator, you are better off giving the switch to the broker as a switch and letting him fill it that way. This ensures that you don’t miss a market by closing one leg and then missing the market on your new leg.
9. Cancelling orders
You should be very precise whenever you cancel an order. You start by telling the broker whether you have a “straight cancel” or a “cancel and replace.” The straight cancel is easy: “Cancel to buy 10 May corn at 1.86 open.” If your broker uses order numbers, he will ask for the number, and you should immediately give it to him without having to fumble through a pile of papers looking for it.
If on the other hand, you have a cancel and replace, you preface your order with, “I have a cancel and replace for you.” And, if the order you are canceling is an open order, it will help the order clerk if you preface your order with, “I have a cancel and replace of an open order for you.” Then you give him the order: “Buy 10 July wheat at the market, cancel to buy 10 at 2.71,” or “Sell 5 May sugar at 6.95 stop open, cancel to sell 5 at 6.75 stop open.
What do you do if, despite your best precautions, you discover you are in an error on some order? You should immediately phone your broker or the order clerk and tell him about the error. You can sort the responsibility later.
First, be sure you and the account executive or broker agree on what actually happened. Did you buy or sell, what quantity, what commodity and at what price. Then you can make a quick decision if you are willing to take the fill.
For example, you may have wanted to buy March sugar, but they bought the same quantity of May. If it’s a new position, you may be willing to take it; however, if you were covering a March short, then you need a fill in March and not May.
Anyway, if you don’t want the position, get out of it immediately. Don’t sit back and try to “play” the error. You may get lucky and work out of it successfully. But, more than likely, you’ll compound the error and end up with a big loss when you could have walked away with just a minor loss.
Keep this maxim in mind: “The first loss is usually the cheapest.”
ANY STATEMENTS OF FACT HEREIN CONTAINED ARE DERIVED FROM SOURCES BELIEVED TO BE RELIABLE, BUT ARE NOT GUARANTEED AS TO ACCURACY, NOR DO THEY PURPORT TO BE COMPLETE. NO RESPONSIBILITY IS ASSUMED WITH RESPECT TO ANY SUCH STATEMENT, NOR WITH RESPECT TO ANY EXPRESSION OF OPINION HEREIN CONTAINED. THE RISK OF TRADING COMMODITY FUTURES MAY BE SUBSTANTIAL. ONLY RISK CAPITAL SHOULD BE USED FOR SUCH INVESTMENTS.