The orders that you will be entering to trade my system are for the most part pretty basic. You should become very familiar with these orders. I have limited them to the orders that are available with on-line trading. However there is an order type that I included below that I like to use and you may want to become familiar with it. It is called Order Cancels Order (O-C-O), also known as "One Cancels the Other". This order is very handy when you can’t stay close to the market and, as I will explain below you are trying to get out at a profit price but want to leave your protective stop in there also.


Explanations of Orders

Market Order - A market order does not specify a price; rather, it instructs the filling broker to execute your order immediately on receipt at the best prevailing price. It is "order language" for "Get me in now" or "Get me out now."

Note: If your market order is received by the filling broker in advance of the market opening (exactly how far in advance is determined by the respective commodity exchanges), the order must be filled within the opening range of prices (also as determined by the respective commodity exchanges).

Limit Order - A limit order stipulates a price, which the filling broker must equal or better in the execution of your order. If you’re buying, your price limit must be at or below the current market price; if you’re selling, place your limit order at or above the current market price.

In general, you will not be guaranteed a fill on your limit order unless the market trades through your price because there may not be enough trades occurring at your price to ensure that your particular order will be executed.

An example of how to express such an order would be, "Sell one September Copper at 7190 or higher."

There is a special situation involving limit orders in which the order specialist will flag your limit price with an OB, meaning, "Or Better". This is done when a trader wants to place a price limit at or through which the market is already trading. Without the OB designation, the order ends up looking like a cross between a limit order and another type of order called a "stop" (see below), a confusing situation that can lead to delays and/or errors. The OB designation clarifies for the floor broker your intention that the order be treated as a limit order.

Market if Touched (MIT) - An MIT order becomes a market order if and when the market hits a price specified by you.

Like limit orders, buy MIT’s are placed at or below the current market price and sell MIT’s are placed at or above the current market. Unlike limit orders, the broker is not restricted as to the fill price once your MIT has been elected, he will execute your order at the best prevailing price, the same as any other market order.

When you place an MIT order, you are telling the broker, "If the market hits this price, fill my order right away."

Stop - This order also becomes a market order when elected. The stop differs from the MIT in that buy stops are placed at or above the current market and sell stops are placed at or below the current market.

Many traders refer to the stop as a "stop loss" order because it is commonly used to liquidate positions against which the market has moved. Traders using stop orders in this way are telling the broker, "If the market moves this far against me, get me out right away." Traders also frequently use stops to initiate positions, especially when they want to buy "on strength" or sell "on weakness".

Stop Limit - A variation of the simple stop is the stop limit order. It instructs the filling broker to execute your order at your stipulated price or better once the order is elected. (Again, stops limits are placed above the current market for buys and below the current market for sells.) The purpose of this type of order is to give the trader more control over his fill price; however, if the market runs the stop limit price before the broker is able to execute it, the order will become a straight limit order. In this situation, if the market does not return to trade through the stipulated limit price before the order expires, it could be returned as "unable".

Stop with Limit - This is similar to the stop limit, except that the trader must stipulate two prices with the limit price being farther away from the current market than the stop price. The separate limit is intended to give the filling broker a bit more leeway in executing the order while still allowing the trader some degree of control over the execution price.

To enter such an order, imagine that September Copper is trading at 7190. You might enter an order to buy one contract by saying, "Buy one September Copper at 7205 stop, 7215 limit." Now, if the market rises to 7205 electing your stop, the broker must fill it at 7215 or lower. If the market runs the limit price making such a fill impossible, this order, too becomes a regular limit order.

Cancel/Replace - A cancel/replace order instructs the broker to cancel a working order and replace it with another order that has been adjusted in the price, qualifier, quantity and/or tern of duration. You may not change the action, buy/sell, commodity or delivery month in a cancel/replace.

When you enter a cancel/replace, tell the order specialist up front of your intention to do so. Identify the old order so the order specialist may locate it, and then proceed with your new instructions.

The advantage to using cancel/replace is that it precludes the possibility of being "double filled" (being filled on both the original and replacement orders) because the broker may not work your new order until your old order has been located and canceled. Thus, if the original order has already been filled, your new order will be canceled and you will be notified of your fill on the first order. The obvious disadvantage is time: cancel/replaces take longer, so if the order you are canceling is well off the market and not likely to be filled in the next few minutes, you may wish to simply enter your new order and straight cancel the old one.

Order Cancels Order (O-C-O) - Also called "One Cancels the Other". This order consists of two alternate instructions to the filling broker, who will execute whichever portion of the order he is first able to and then automatically cancel the alternate instruction.

This type of order is handy when you want to initiate or liquidate a position by one means or another, but are indisposed to watch the markets in the interim. Suppose you are long one contract of September Copper at 7205. The market is currently trading at 7380. You would like to take profits at 7410, but if the market declines to 7305, you want to get out. Since you will be traveling and unable to watch the market, you might opt to place this order:

A conversation might go like this; "For account #12121 place an open order, O-C-O. Sell one September Copper at 7410 OB or 7305 stop." (It helps if you tell the order specialist in advance that you will be placing an O-C-O.)

I have not seen an on-line broker that allows you to place an O-C-O on line. To place an order like this you would have to call your broker.

There are other types of orders and not all exchanges take every order. Check with your broker to make sure which orders are available at the exchange you are trading and you know which one you want to use.

How and When Orders Are Placed

My system will enter and exit the market using the orders that I have described above. To enter a trade, I will sometimes use a stop to buy on strength or sell on weakness. If I am not filled this way and I have a signal to get in the market I will use a market order that is placed before the open. Once in the market, a straight stop loss is entered as an open order. If the market closes at a price that tells me I should get out with a loss and the initial stop is not hit, I will get out with a market order on the open the next day.

If the market moves in my favor I will cancel my initial stop loss and replace it with a break even stop. At this time the market may be approaching the price that I would like to get out with a profit. You have several options in deciding how to get out. You can use an MIT order to take your profit. This is a "conservative’ approach because I have seen my price get hit but I wasn’t filled and the market moved away from that price leaving me wondering what to do. Getting out with a limit order is usually the way I exit with my profit. The market does have to trade through the price to get filled. I am usually watching the market and if my price was hit and I wasn’t filled I usually cancel/replace my order with a market order.

You might want to use an O-C-O order at this point. Having two orders in the market at the same time does leave you open to getting filled on both. My break even stop and profit price are usually far enough apart that you should have time to cancel one if the other is filled. I have never seen the market hit both prices in one day using this system, however if both prices are within the day’s trading limit it could happen.

Decisions to place orders or cancel them are always done after the close and never during market hours. That makes this system very manageable with a full-time day job