Stop Limit Orders and OCOs

Q. What is a 'stop on close' order?


A: This is a type of stop that will trigger based on the closing market level for the day. The whole idea of having a 'stop on close' is to allow space for daily fluctuations and a possibility to remain in a trade even if intraday volatility is such that the stop is breached during a day's trading but the market level then returns to a lower level before the close such that the position keeps running.

For example let's take the case of Vodafone that was trading at 138p in October and at the time you thought that the price won't hold. So you open a short trade with a target of 125p but also a 'stop on close' level of 142.75p. In the next few days Vodafone happens to open strongly at a price of 143.50p, which is above your stop loss level. However, later on in the day the price had retraced back to 141.50p which is under the stop loss level so your trade will remain open. Compare that to a normal stop loss order which would have closed your trade as soon as the price hit 143.50p.

This happens because most of the daily trading activity usually takes place in the morning session when most traders tend to react emotionally to any previous day or overnight market happenings. But as the trading day progresses, traders tend to look more closely at the market dynamics and more often than not will review any market action which will lead to price adjustments. The only disadvantage is that such a stop may risk making your trades prone to extra slippage if the prices at the close happen to breach well beyond your stop loss level for a short trade. However, it does help to remain in the market especially for volatile short trades.

Q. What is a stop limit order?

A: This stop order allows you to set a less favourable level at which you want to enter the market and limits the price you'll pay to within an acceptable range. This is is usually used to take advantage of market breakouts (aka as momentum trading) which most often than often occur so quickly that they are easy to miss. So for instance assuming that Barclays is trading at 300p and has been trading around this level for sometime but a breakout to the 330p level would confirm the continuation of the uptrend. To take advantage of this a spread better would place a stop limit order at 330p with a limit of say 360p.

You can even use limit orders together with specific buy or sell levels - for instance it is important to have an idea as to how much you can expect to gain on a specific contract and close the order once that target has been reached. This prevents the position turning into a loss-making trade, a strategy quite useful in volatile times where a winning position can quite abruptly turn into a heavy loss-making trade. Lastly, you can naturally use limit orders to close profitable positions once these reach your profit target. For example, if you go short on the FTSE 100 at 5,000 and the market hits 4,900, you can set a limit buy at 4,910, thereby guaranteeing 90 points' profit.

Note that not all providers over this type of order -:.

IG Index does offer this kind of order which are referred on the site as 'Stop orders to open'. GFT UK also offer this type of order.

It is also possible to do this with Spreadex. Either limit or stop orders can be used to either open, close, take profit, take loss, etc... You will need to know stop and limit parameters, i.e. minimum distance, whether guaranteed or not (guaranteed stops are charged but offer 100% insurance, regular stops don't. Positions are closed at the first available traded price).

At CMC Markets there are a variety of types of orders and those include STOPS and LIMITS. They can be used to enter the market as well as to exit from a position. In reference to this example: If Barclays is trading at 300p and you wish to buy and enter at 330p then you would place and IF DONE ORDER linking 2 consecutive orders whereby the first one would be a STOP BUY at 330p and second one is contingent on the first one being executed and that could be your LIMIT sell at 360p to collect the profit.

The ETX Capital trading platform allows you to place a momentum order but it does not allow you to set a limit on the price you will be filled at so you can get filled at a worse price than the level you are asking for. So in your example for Barclays if you set an order to buy when the market reaches 330 and in the morning it opens up at 362 then you will buy at 362. Conversely if you were setting a sell limit order at 330 you would sell at the improved price of 362.

LCG offers a type of order allowing you to either buy above the current market level or sell below that level at a price specified by you. Automatic stop losses are allocated to each bet placed on their platform and these are used to limit the loss which can be made on a single position. They also offer a new order system on their platform which is an order to a open a new bet at a level in the market which has not yet been reached. It is not attached to any existing bet in the way that a stop order is and is independent of any other instruction.

Q. What's the difference between a Stop Loss and a Limit Order?

Stop Loss and Limit Orders are useful tools provided by most spread betting platforms to allow individual traders to monitor their risk. It's impossible for a trader to watch every price tick and close their trade once it hits a specific price, so both Stop Loss and Limit Orders are used to automatically close a trade once it hits the investors target price. For many investors, stop loss and limit orders provide some sense of “security” and avoids you being glued to the screen 24/7.

We will examine both concepts individually to assist you to understand their differences.

Stop Loss

Basically the stop loss is the point at which you direct your spread betting firm to close your position, by selling on a long position or buying back on a short. Stop losses can help reduce your spread betting risk and help guard you from experiencing large losses.

If you are betting on a stock gain per point and the stock begins rapidly losing ground, your stop loss order would kick-in at the pre-determined level you set. Keep in mind, that in times of volatility the close-out price could be a few points away from the price you have set. Some spread betting providers, allow you to select 'Guarantee Stop', which ensures the position will be closed out at your target price, but this option will often cost you more when entering into the trade. If you believe there will be substantial volatility in the stock, than the ‘Guarantee Stop’ is the best way to make sure you don't lose more than you have to.

Experienced spread betting traders understand the importance of managing their downside risk and will often impose stop loss orders on themselves, so investors new to spread betting should especially take time to understand this tool when starting out.

Whichever way you look at it, if you are spreadbetting, putting a stop loss in place is a good way to ensure you have more control over your spread betting losses, which is often something that many traditional stock traders who move into spread betting see as mandatory.

Limit Order

In the world of trading the limit order is the brother to the stop loss, but their prime use is to ensure you take your spread betting profits at a level that you have pre-selected.

Similar to the stop loss, the limit order automatically closes your position once the stock price hits a certain value and the limited order can usually be changed any number of times.

A limit order will basically protect you if your position does hit a preferred target during trading, but then drops back again before you were able to close out the trade. Again, it avoids the necessity for a trader to watch the stock price tick to the target price. It's also a useful tool, in prompting you to think about an exit strategy which many people forget to consider.

The only risk with a limit order is that if the stock price moves right past your limit offer price, you are left with the stock being closed out at a lower price, thus undermining your potential profit.

Limit order are often a difficult concept to grasp for beginners, so here an example to help explain the principles:

Say you have a betting spread bet on ABC shares with a limit order when the price of ABC stocks reaches £18.

Let's say the ABC opens the day's trading at £15, and then closes at £20, the trade would close out at £18 and the spread better would make a profit of £3 per point (£18-£15).

Stop losses and limit orders are great tools for spread betting compatriots and come highly recommended within most spread betting companies.

Q. What's the difference between Order and OTO?

A: Order is when you actually open the trade and OTO means order to open. This is where you program an order to open at a certain level if the market hits that level. The only problem with using orders to open is that it gives the spread betting company a license to open a trade for you at a bad price if the market gaps through the level you have entered.

Q. What is an OCO Order??

A: OCO is a conditional order (one cancels the other). You can link an 'if done' order to an OCO (one cancels an other) to automate profit taking. This allows you to input two orders in the market in such a way that if one gets triggered the other is automatically cancelled thus allowing you to both input a stop loss order and a limit order at the same time. Should the market rise to hit your limit price your spread bet would be closed at a profit, with the OCO cancelling the stop - this avoid the risk of the market reversing and triggering a new short position.

Here is one simple trading plan for a trade which includes more strategy orders than most traders would consider for multiple spreadbets -:

A trader is following February Brent Crude Oil future contract which is currently trading at $85 per barrel. The crude oil price has recently experienced a rally but the trader is still upbeat that the oil price will continue rising although he reckons that there is a risk of a short-term pullback to $80 before the climb continues. Having examined the charts, the traders reckons that the price could well climb to the $97 level before hitting strong resistance. However, he's worried that a retracement to $76 might lead to a further fallback to $66 and he doesn't want to keep holding if that happens. The trader could place the following order:

Buy £10 of February Brent Crude Oil at a limit of $80.00 If done, sell £10 at $97.00 limit, OCO $76.00 on stop - all GTC (good till cancelled).

This trading strategy includes a limit, stop, contingent order and an OCO - all worked 'GTC' (good till cancelled). There is a limit order to open a position should the oil price retrace to $80. Contingent to this order being filled there is a limit to close the spreadbet at a profit should the oil price reach $97. In addition, there is also a contingent stop to close the position should the market move against the trader and hit $76. This will protect against losses continuing to spiral should the market continue moving in the opposite direction. This combination of orders represents an OCO order: if the limit of $97 were reached first, then the stop loss order at $76 would be automatically cancelled.

 ...Continues here - How Contingent Orders Work

Recommend this on Google

The content of this site is copyright 2016 Financial Spread Betting Ltd. Please contact us if you wish to reproduce any of it.