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What are Limit Orders and what are Stop Orders.
On our markets we can distinguish two kind of orders. We have
the market orders and we have limit orders. The difference between these two can be described as follows.
The market order, sometimes referred as bestens order, is an order by which we want a commodity (future, stock, metals, oil) at the price the market gives us. The advantage is that we will get what we want but the disadvantage is that the price we get (filled price) can be different from what we expected or what we had in mind.
This can be avoided by placing limit orders. We say to the market buying or selling a commodity for a specified price. In fact you say
I want this or that only for that limit price or for a better price.
The advantage is clear, you wont be surprised by an unexpected price.
The disadvantage is that you wont get your commodity allways. Let me
explain this. Markets may never reach your limit price. Suppose you
want to buy the DAX at the limit price of 4020 where the DAX is now
at 4010. It is clear that if the DAX doesnt rise to a level of 4020
you wont be able to get the DAX. But this isnt all.
Consisider the situation you are placing the limitorder at 4020 and the dax is rising above the 4020. Will you be in? In most cases yes but not allways.
When marketmakers (they set prices) dont trade the dax at 4020 but at
eg 4022 you are not in. This occurs when the markets are rising
rapidly. Markets move by tics, but these tics dont necessarily be
the minimum amount eg at the dax a half point. It can be up to 4 points
or more. So when the last tic is 4019 and the next tic is 4022 your order
wont get filled. This is important to be aware of when placing limitorders.
These principles also occur when using stop orders. Stops arent
really orders at all. They are triggering orders when a stop is
reached. Now you can have two ways stops can trigger an order.
First it can trigger a market order, such a stoporder is referred
as a normal stop or just stop. Second a stop can trigger a limitorder,
which is then called a stop limit.
The advantage of a normal stop is that you get want you want, you buy
or sell no matter what but your fill price is not in your hands. It
just can be a way off your stop because the stop just triggers a
market order and the next tic can be anything. The difference between
your stop and the fill price is sometimes exclusively called slippage.
An example. Suppose you go long on the DAX at 4020 and you place two
orders, one at level below the market at 4010 and one above the market
at 4030 being the target of your position (sometimes called a bracket order).
When your stop at 4020 is reached a bestens order is triggered to close
your position at market. You will get out at market at the next tic
(some brokers provide a volume dependant exit).
Now consider a stop limit order. When reaching the stop a limitorder
will be triggered. In most cases you can specify what this limit order
will be, not necessarily being at the level of the stop. The disadvantage
is clear, as with "normal" limitorders when the market doesnot trade your
limit price you wont get out. In the above mentioned example when you
place a stop limit at 4010 and a stop limit at 4030 and the market is
falling rapidly to a level of 4010 your limit order will be triggered.
But if volume is not big at these levels and the next tic is eg 4012
you will stay in! You are not stopped out how deep the market will fall.
There is no way you can do anything about these things happening on
the markets: some brokers pay you difference between your stop
and your fill price but only a few do.
How exactly a stop order will be triggered depends on your broker. Some
give you the possibility to trigger the order only after two or up
to ten trades which much have been executed before executing your order
or a specified variation in consequtive tics.
Is this important to know? It is if you want to know how the market
works but it has also a practical meaning: dont be astonished when
your filled price differs from your stop, dont blame your broker
or the market or yourself, there is nothing what can be done about this.
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© Copyright 2005 Carlo.
Last update: 11/11/2005; 8:51:22 PM.
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