Different Types of Spread Betting Orders
As a spread better, you interact with the market by using a variety of instructions called orders. To execute the different parts of your strategy as painlessly as possible you need to use different types of orders. Let’s examine each of these order types in turn before looking at an example trade.
An order is simply an instruction given to buy or sell a particular instrument if a certain price is reached, whether this is above or below the current market price. These can be useful if you are not able to monitor the markets throughout the day. You can place these instructions online or over the phone. Orders can be placed, deleted and amended 24 hours a day, 7 days a week. However, they are only active during market hours.
When an order is placed, there are three possible outcomes:
- The order level is reached; it is filled and becomes a live trade.
- The order is cancelled by the account holder before the level is reached.
- The order level is reached and closes your open position if you already have a live trade in the same product in the opposite direction.
Market Order
A market order is the simplest type of instruction you can create. It is executed as soon as it is received by the broker and can be used to enter or exit some or all of your position. A market order is as such a request to buy or sell at the current market price guaranteeing execution, but not price. Because of this, a market order will be filled at the first available price. The price you get filled at may not be the exact same price you saw on screen when you exited the order, especially in a fast moving market.
Limit Order
A limit order specifies that a trade must be executed at a specific price or better. Traders typically use limit orders in an attempt to capture profits and exit a position—however, they can also be used to enter a position.
Limit orders are placed in the market and will be executed automatically when price reaches that level. A buy limit would enable us to enter a long position (or close a short position) if price falls to the limit price or below. A sell limit would enable us to enter a short (or exit a long) if price rises to or goes above the limit price.
We use limit orders to enter positions at a “better” price than the instrument is currently trading at. If we want to enter a long, then a buy limit gets us in at a lower price than the current one. If we want to enter a short, the sell limit gets us in at a higher price than the current one. If we are already in a position, a limit order would represent our profit target.
Stop Order
A stop order is used to enter or exit the market at a particular price. A stop loss order is a type of order that is commonly used to help restrict your losses. This is done by closing your position at the first available price when your requested level is reached. You set your level based upon how much you are prepared to lose on a trade.
Stop orders are placed in the market and will be executed automatically when price reaches that level. A buy stop would enable us to enter a long position (or exit a short) if price rises to or goes above the stop price. A sell stop would enable us to enter a short (or exit a long) if price falls to or goes below the stop price.
We also use stop orders to enter positions at “worse” prices than the instrument is currently trading at. A buy stop gets us in at a higher price than currently and a sell stop at a worse price than currently. If we are in a position already, then a stop order represents our stop loss.
Depending on market volatility, execution and price are not guaranteed. Stop orders are commonly used to set an exit point for a losing trade to try to limit risk.
Guaranteed Stop Loss Order
Please note that although normal stop loss orders are free to place, such orders are not guaranteed. Your bet can be opened or closed (filled or struck) at a worse price than you expected if the market ‘gaps’.
When we have an active position we always want to protect ourselves by using a stop loss as described above. Suppose we are long in the FTSE100 at 5000 and have placed a stop loss at 4975. In most circumstances this will protect us to a maximum loss of 25 points.
However, this maximum loss is not guaranteed. Suppose that the FTSE100 closes at 4982 but overnight some very bad news comes out about a number of large companies. The next morning the FTSE100 opens at 4950. Our stop loss is triggered, but as soon as it executes we exit for a 50 point loss.
Some spread betting companies will offer guaranteed stop losses to protect you against such an occurrence. You pay a little extra premium for the peace of mind of knowing your absolute maximum loss.
Trailing Stop
Like a regular stop order, a trailing stop is set a specific number of pips away from the current market price. When the market moves with your
position, the stop setting automatically changes so that it ‘trails’ the current price by the number of pips you set. When the market moves against your position, the stop remains set at the last trailing price reached when the market was moving your way. You can use this to protect profits without limiting potential gains.
OCO Order
A one cancels other (OCO) order is used when you wish to enter two orders on an instrument, but want the second one to be cancelled when the first is executed.
An OCO allows you to set both a stop and a limit order at the same time. When market movements cause either order to be filled, the unfilled order is automatically cancelled. Traders often use this to protect a market order.
Parent and Contingent Order (P&C)
A Parent and Contingent Order allows you to set up an entire trade-including stops and limits—in just one step. Parent and Contingent Orders are a great strategy and are commonly used to protect potential profit and guard against potential loss.
When market movements cause the parent order to be executed, the contingent orders become active until one is filled. P&C Orders are of ten set as OCO orders so that when one of the contingent orders has been filled, the other is automatically cancelled.
Scale-Out Order/Partial Close
With some providers you can use a a scale-out order to exit (as well as enter) a trade in increments. When you select this order type, you can place multiple
OCOs to open or close a multi-lot order.
Market Close Order
These orders will execute immediately prior to the market closing. Use them to exit positions that you don’t want to hold overnight.
Order Duration
Orders that do not execute immediately can be specified to be either good for the day or good till cancelled. Good for the day orders will expire when the market closes, good till cancelled orders will not.
Example Trade
We have a bullish opinion on the FTSE100 but think it is currently overpriced. We therefore want to go long, but only if price comes down from where it is currently trading. The FTSE100 is currently trading at 5301-5305 and we place a buy limit at 5220. Our entry is triggered and we immediately enter an OCO order consisting of a sell stop at 5195 and a sell limit at 5280. We know that we will be exiting this bet for either a loss of 25 points or for a win of 60 points. When our stop loss or profit target is reached, the other will be cancelled