Orders and the CQG DOMTrader
Executing orders is a critical skill for traders to master. Understanding what orders are used for and how to employ them is as important as developing market analytical skills. First, some definitions for new futures traders:
Bid: An order to buy with a set price and quantity.
Jargon: “I am bidding 50 for 10.” The trader is willing to pay 1122.50 for ten contracts. The handle (1122) is dropped.
Ask or offer: An order to sell with a set price and quantity.
Jargon: “I am offering ten at 50.” The trader is offering ten contracts for sale at a price of 1122.50. The handle (1122) is dropped.
Order book: Think in terms of a market maker holding a book of orders received from traders to buy and sell. The best bid (highest buy price) and best offer (lowest sell price) would be at the top of the order book. Orders to buy (bids) at lower prices then the best bid and orders to sell at higher prices then the best offer would be in the depth of the book.
Orders in today’s electronic exchange traded futures contracts are posted and matched by a computer. We see the order book as a depth-of-market view with the inside market (best bid and best ask). Lower bid prices with their respective quantity are listed below the best bid price. Above the best ask of the inside market we will see a series of orders to sell at higher prices and respective quantities. This is called the depth-of –market view.
The inside market is referred to as Level, I Top of the Book, and the depth-of-market view is Level II.
Best bid: This is the posted highest price a trader is willing to pay for the contract. This price will be below the best offered price; otherwise, the two orders would be matched based on first in first out.
The best bid will sit in the order book as a resting order until another trader is willing to sell to the trader at the bid price, another order with a higher bid price is posted, or the trader cancels the order. If a buy order comes at a higher price, then the previous order becomes a resting order below the new best bid price.
Jargon: “Traders hit bids” (i.e., traders are selling). “The market has a real bid to it today” (i.e., traders are stepping up and bidding prices higher)
Best Ask or Offer: This is the posted lowest price a trader is willing to sell a contract for. This price will be above the best bid price; otherwise, the two orders would be matched based on first in first out.
The best offer will sit in the order book as a resting order until another trader is willing to pay to the trader the ask price, another order with a lower ask price is posted, or the trader cancels the order. If an order comes in to sell at a lower price, then the order becomes a resting order above the new best ask price.
Jargon: “Traders lifted offers” (i.e., traders are buying). “The market is offered today” (i.e., traders are continuously trying to sell contracts)
Inside market: The posted best bid and best ask price
Size: The quantity of contracts available at the respective bid and ask price.
Hit the bid: To sell a contract at the bid price. This is often done with a market order, but a trader could use a limit order to sell at the bid price.
Take or Lift the Offer: To buy or pay the offered price. This is often done with a market order, but a trader can buy using a limit order.
Last price: The price the last trade was executed. If the market was bid 1122.50 and offered at 1122.75 and a trader sold one contract at the market and was filled at 1122.50, then the last price was 1122.50. If a trader bought one contract at the market and paid 1122.75, then 1122.75 is the reported last price.
Market Orders
A “buy at market” order is an instruction to pay the best offered price for the contract. A “sell at market” order is an instruction to accept the best bid price for the contract. The trader has to accept whatever the price is on the fill.
Traders use market orders because they want to execute the trade and they are indifferent to the price.
If the e-mini S&P 500 was 1449.50 bid and offered at 1449.75 then:
A buy at market order will be filled at 1449.75
A sell at market order will be filled at 1449.50.
Limit Orders
The order has a specific price stated. For example: Buy five e-mini S&P 500 for 1448.75. The trader is not willing to pay a price higher than 1448.75.
Or, sell five e-mini S&P 500 at 1449.50. The trader is not willing to sell at a price lower than 1449.50.
If the e-mini S&P 500 is 1449.50 bid and offered at 1449.75 then:
A buy order with a limit price at 1449.75 will be filled at 1449.75
A buy order with a limit price at 1449.50 will be placed in the queue as a resting order.
If the e-mini S&P 500 is 1449.50 bid and offered at 1449.75 then:
A sell order with a limit price at 1449.75 will be placed in the queue as a resting order.
A sell order with a limit price at 1449.50 will be filled at 1449.50
Limit orders to buy are generally placed at the current market price or below the current market price. Traders are trying to buy when the price drops.
Limit orders to sell are generally placed at the current market price or above the current market price. Traders are trying to sell when the price rises.
Stop Orders
A stop order has a price and becomes a market order when the market trades at the price.
Sell stop orders are placed below the current market. Buy stop orders are placed over the current market.
For example, if the current market is 1449.50 bid and offered at 1449.75 and if you placed a sell five e-mini S&P 500 at 1445.50 stop, then the stop order is a resting order.
The market has to trade down 1445.50 and if the market does then order then becomes a “sell at the market order.”
A trader may hold a long position and will place a sell stop under their entry price to limit the loss on the trade. For example, the trader has bought the e-mini S&P 500 for 1449.50 and will place a sell stop order at 1445.50 stop to limit their loss to just four points. Traders also call these orders stop loss orders.
A trader may hold a short position and will place a buy stop over their entry price to limit the loss on the trade. For example, the trader has sold short the e-mini S&P 500 at 1445.50 and will place a buy stop order at 1449.50 stop to limit their loss to just four points.
Because the order becomes a market order when the price is hit, the fill may be worst then the stop price on the order. This is called slippage.
Stop Limit Orders
Stop limit orders are similar to stop orders except the order becomes a limit order if the price is hit instead of a “market order.” Traders use this to reduce the slippage factor that occurs with the regular stop orders.
For example, a trader may hold a long position and will place a sell stop limit under their entry price to limit the loss on the trade. The trader has bought the e-mini S&P 500 for 1449.50 and places a sell stop limit order at 1445.50 stop limit their loss, but the order becomes a limit order to sell, and the trader may not be filled if another trader is not willing to pay the 1445.50 price.
CQG does allow traders to use a trigger price for the stop limit and a different limit price. For example, sell five e-mini S&P 500 at 1445.50 stop limit 1444.50. If the market trades at 1445.50, then the stop is triggered and becomes a sell five at 1444.50 limit.
Other uses for Stop and Stop limit Orders
Traders use stop and stop limit orders to enter into a position. For example, the trader may think that if the market trades above a certain price, then they want to take a position.
If the current market is 1449.50 bid and offered at 1449.75, but on the chart the trader believes that if the market trades above 1452.50 is a breakout and the trader wants to take a long position. The trader will place a buy order for five e-mini S&P 500 at 1452.50 stop. If the market trades up through 1452.50 ,then the trader will buy five at the market.
Trailing Stop or Stop Limit Orders
CQG offers trailing stop and stop limit orders. The CQG client will automatically adjust the trigger price of the order as it moves in the trader’s direction.
If a trader holds a long position and as the position moves higher the stop price will automatically climb with it. For example, a trader is long five e-mini S&P 500 at 1452.50 and places a trailing sell stop at 1448.50. Two hours later the market is trading at 1460.50 and the trailing stop has automatically climbed to 1456.50 stop, locking in a profit if the market reverses.
One-cancel-other Orders (OCO)
Traders will bracket a market with two or more orders, and use a chained or OCO order. The trader may place an order to take a profit and if that order is filled, then the stop order for risk management is automatically cancelled. On the other hand, if the stop order for risk management is filled then the limit order to take a profit is automatically cancelled
For example, a trader is long five e-mini S&P 500 at 1452.50 and places a sell five e-mini S&P 500 at 1460.50 limit OCO sell five e-mini S&P 500 at 1448.50 trailing stop. If either the limit or the trailing stop or is filled then the other order is automatically canceled.