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Futures Pricing - Introduction
Types of Futures Pricing
The orders that are used in futures trading can be classified in the following categories:
Opening Order --> Entry Filling Orders --> Order Duration --> Exit Order --> Stop Orders --> Advanced Orders
Opening Order is the specific action you want taken in order to put on a new futures position.
Filling type is how you want your broker to execute your order in terms of price.
Order duration is how long you want your broker to keep an unfilled order in the system.
Exit order are orders you use to close an existing futures position.
Stop orders are orders used for stop loss.
Advanced orders are highly customizable orders that executes precise trading orders when certain conditions are met.
Futures Opening Orders
Opening orders are the specific Futures Pricing you take in order to open a new futures position. Like stock trading, there are really only two choices; Buy (Long) or Sell (Short).
Some futures brokers use the term "Buy" while some brokers use the term "Long", both refers to the same thing, which is to take the long side of a futures transaction. Being long on a futures transaction obligates you to buying the underlying asset upon maturity (in physically delivered futures contracts) and you will therefore profit only when the underlying asset appreciates in price. Generally, one would use the "Buy" or "Long" order to enter into a futures position when one is bullish on the underlying asset.
Some futures brokers use the term "Short" instead of "Sell". Using this order puts you on the short side of a futures transaction. This means that you are obligated to sell the underlying asset upon maturity and therefore profit only when the underlying asset depreciates in price. Generally, one would use the "Sell" or "Short" order when one is bearish on the underlying asset.
Futures Filling Orders
Again, similar to stock trading, you get to choose how the futures trading broker is to fill your opening order in terms of price. There are two main filling order types; Market and Limit. You might also see another two choices in your futures trading order form, Stop and Stop Limit, which are to do with exit orders and will be covered further down this page.
Market orders are Futures Pricing that instruct your broker to enter the futures position at the best possible market price. This means that your futures broker will attempt to fill your opening order as quickly as possible at the best available price in the market, which may not be that great a price. In fact, for futures contracts with very bad liquidity and a huge bid ask spread, using market order may result in very disadvantageous prices as you are largely at the mercy of the market makers. This is why market orders are usually used only for quick filling of highly liquid futures contracts with very tight bid ask spread.
Limit orders are Futures Pricing that instruct your broker to enter the futures position at the price that you specify. Some brokers will take limit orders as an instruction to fill at no other price (even if it is more advantageous) than the limit price stated while some brokers will take it as the price stated or better (which makes the Or Better order redundant). Limit orders are typically used in order to enter at a more advantageous price than the market price. As such, limit orders to buy are typically placed lower than the market price and limit orders to sell are typically placed higher than the market price. The problem with such an order is that the price of the futures contract may never come back down to the limit price, causing futures traders to miss the entire trade. As such, limit orders should be used with caution and typically for less liquid contracts with a wide bid ask spread.
Market and Limit order are Futures Pricing that instruct your futures trading broker to execute your order immediately. However, there are also filling orders that instruct your broker to execute your orders only when certain timing criteria is met. Take note that not all brokers or markets offers all of the timing orders discussed here.
This is a market order that instructs your broker to fill your order at the market price when market opens. Very few brokers offer this order anymore since it can be made redundant by queuing a market order before futures market opens.
This is a market order that instructs your broker to fill during the final seconds of the futures trading session.
This is a futures order that instructs your broker to fill your order at the market price once the price of futures contract exceeds a price set by you. The difference between a MIT order and a limit order is that if your broker is one who fills limit orders right on the limit price and nothing better, you may end up missing the entire trade if the contract gaps past the limit price while a MIT order will attempt to fill your order at any market price when the set price is reached. An MIT order is also executed only when the set price is reached while a limit order is executed the moment it is set, overriding all other advanced orders. As such, an MIT is also preferred if you wish to have multiple kick in prices for your order or have other advanced orders existing on the same contract.
Futures Order Duration
Order duration tells your broker how long to keep your futures order in the order system. There are two main Futures Pricing duration types; Day Order and Good Till Cancelled (GTC).
Day order is a futures order that lasts only for the very trading day and gets cancelled by the end of the trading day if it is not filled. It is usually used for placing limit orders for entry into a new position for that day only.
Good Till Cancelled (GTC)
Good till cancelled is a futures order that lasts as long as it is not manually cancelled. This is an order that can remain in the future broker's system, waiting for execution when its criteria is met. This is why the Good Till Cancelled (GTC) order is usually used with advanced orders or stop loss orders that needs to be held for a significant period of time.
Futures Exit Orders
Exit orders are Futures Pricing used when closing off a current futures position. There are three main ways to end a current futures position; Offset, Roll and Reverse.
Offset is a futures order you will find only in futures trading. Offsetting a futures contract means closing it by going into an equal and opposite transaction. This is the standard way of closing all futures positions and is also the most common action taken by futures traders prior to expiration day. By offsetting your position, you are closing it and realizing all profits or losses and to have no further involvement in that position. Read the tutorial on Offsetting Futures.
Rolling a futures position forward means closing off the expiring futures position and then going into a similar futures transaction for a further expiration month. Futures traders do this when they wish to remain in a position for a longer period of time. Rolling forward a futures position is a transaction that simultaneously closes the current position and opening the new position for the price difference. This is different from first offsetting the current futures position and then opening a new further month futures position as there would be a time difference and a break in continuity of the position. Read all about Roll Forward.
Reversing a futures position means closing off the current position and entering into a trade on the same futures contract in the opposite direction (Some futures traders also use the term "Reversing Trade" to mean "Offset" which is very ambiguous). For instance, if you were long a specific futures contract, reversing it will exit your long position in that futures contract and enter into a short position on that same futures contract at the prevailing market price. This is really a futures order that does two things in one order; Offsetting the current position, Buying into a new and opposite position. The advantage of using a Reverse order is that the orders are executed simultaneously so that there are no time gaps between the two orders, allowing for extremely precise trading of very tight price volatility. Read all about Reverse Order.
Futures Stop Orders
Stop orders are Futures Pricing used for the purpose of stop loss, just like in stock trading. Having a stop order in place on your futures position allows you to automatically sell your position when your stop loss policy is met according to your futures trading plan. Indeed, stop orders are so useful because it does the hard job of cutting loss for you without emotional involvement. There are three main types of stop orders; Stop Market Order, Stop Limit Order and Stop-And-Reverse.
Stop Market Order
A stop market order or simply stop order, is a futures order that instructs your broker to sell (offset) your position at the market price when moves lower (in a long position) or higher (in a short position) than a specified price. The position is then sold at the market price which could be a low worse than the price specified especially in a less liquid futures contract.
Stop Limit Order
A stop limit order works exactly like a stop market order except that instead of becoming a market order after it is triggered, it becomes a limit order at a price that you specify. The risk of doing so is that you really won't know what the market price at the time may be and your limit order may never get filled if its a price which the market never reaches.
Stop And Reverse (SAR)
Not many futures brokers offer this kind of stop order but this is one that is extremely useful for day trading of very tight price volatilities. This is a futures order that automatically executes a Reverse order when certain price limit is met. This allows you to trade a short and quick move in one direction and then quickly and automatically reverse the order, take the opposite side of the trade to trade an expected pullback.
Futures Advanced Orders
Advanced orders are Futures Pricing that performs order execution in a more complex way, allowing you to set exact parameters which allows your positions to be filled or traded exactly the way you want it to be without any human involvement. Not all futures brokers offer advanced orders and some of the main advanced orders are; Trailing Stop, Contingent Order, One-Cancel-Other and One-Trigger-Other.
This is perhaps the most used advanced order for profit taking and stop loss all in one. Trailing stop is an order that instructs your brokers to continuously track the highest price achieved by your futures contract and then sell it when the price retreats by a certain percentage point or actual dollars and cents. The advantage of a Trailing stop is that it allows a futures position to run with its profit and sell only when the trend starts to retreat, marking a position reversal point.
This is a highly customizable order that instructs your broker to perform certain action contingent upon the fulfillment of certain criteria. It is an advanced version of the Market-If-Touched kind of orders that allows you to adjust the exact criteria and parameters that goes into it. For instance, you could instruct your broker to sell your futures position not only if the price of the futures contract reaches a certain limit but even specify to sell your futures position when the price of the underlying asset reaches a certain price, making it possible for precise price action trading using futures.
One Cancel Other (OCO)
This is an order that is useful when you have two criterias for entering or exiting a futures position. For instance, you might want to enter a futures position if the position pulls back slightly to a lower price or breakout to a higher price. In this case, by entering an OCO order on both criteria, the broker will execute whichever criteria gets fulfilled first and automatically cancel the one that doesn't so that you don't end up with two positions.
One Tigger Other (OTO)
This is an order that is useful when you want to have a stop loss order placed right after a position is filled. One trigger other order triggers the placement of an order when another order is filled. For instance, you might want to enter a futures position at a certain price and once it does, you want a stop order to be placed. In this case, you could setup a stop order to be triggered by the filling of the futures position using an OTO order.
Typical Futures Entry Order
Typically, when entering into a new futures position on the Long side, the opening order "Buy" is used along with a limit price on the prevailing ask price so that there are no nasty surprises on the filling price (which is typical of market orders) and a Good till Cancelled order so it remain valid until you manually cancel the order. Below is the picture of me taking the Long side of AAPL's May2010 Single Stock Futures.
Typical Futures Exit Order
Typically when exiting an existing Long futures position, you will choose to offset the position using the "Sell" order along with a limit price on the prevailing bid price so that there are no nasty surprises on the filling price and a Good till Cancelled order so it remain valid until you manually cancel the order. Below is the picture of me closing my Long position in AAPL's Sep2010 Single Stock Futures.