January 19


How Do Good Orders Go Bad?

By Julia Ellinghausen

January 19, 2021

You grab a gallon of milk out of the fridge. It’s early in the morning and you are starved!

You fill a bowl with your favorite cereal. You cover it with milk and dig in! Nothing like a bowl of your favorite cereal and cold milk first thing in the morning when you are starving.

WHAT THE *@$% (insert your favorite expletive)???

You run to the sink to spit out a mouthful of cereal and the worst tasting sour milk you wish you never put in your mouth. The taste lingers all day.

Ironically, good milk and good futures orders have something in common. They can both go bad quicker than you expect.

When they do, they will leave a very bad taste in your mouth that lingers longer than you would like.

Understanding the type of orders we use and what can turn them sour is critical for traders. Otherwise, we will continuously suffer losses When Good Orders Go Bad!

What makes a “limit order” good and why would it turn bad?

A limit order is a buy or sell order that can only be executed at a price equal to or better than the specified limit price on the order.

Limit orders are primarily used by less aggressive investors and traders. They are willing to risk not having an order filled rather than having it filled at any price less valuable to them than the limit imposed.

The greatest benefit of a limit order is that it guarantees the buyer or seller will receive at least the price they desire for the asset being bought or sold.

The risk involved in using limit orders is that your order could end up like that gallon of milk in your refrigerator that ruined your cereal. Just like milk, orders that are held too long can spoil in a hurry. Then they leave you with a really bad taste in your mouth.

When using limit orders, it is important to monitor them constantly to make sure they stay fresh and relevant to the market. They do take a little extra attention and care to maintain.

How bad could a good “market order” get and why?

Market orders are another VERY commonly-used type of order. A market order is simply entered into the market and executed at the current bid or ask price for an asset at the moment the order appears.

The great thing about market orders is that they provide instant executions when they hit the market. There is never a doubt about liquidity because there is always demand on both sides of a trade at any given time. Market orders WILL be filled immediately.

Sounds like a pretty good deal, doesn’t it? What could possibly go wrong with an order like this? Market orders can spoil much faster than a gallon of milk. In a case like the example below, the stock fell 2% in under a minute!

The market can move suddenly and crush a poorly timed order

After it had moved smoothly along for most of the day, the price fell precipitously. What happened to the milk of those who placed market sell orders at the wrong moment that day?

The milk that appeared perfectly safe at one minute was toxic in the next. Traders had their “safe” market orders turn sour instantly. Volume soared and prices collapsed. Talk about leaving a REALLY bad taste in your mouth!

If you think back to some of the “flash crashes” experienced over the last few years, you can begin to appreciate how quickly a good market order can go bad.

It can happen in the time it takes to click: “Place Order”.

Why isn’t a “stop loss order” ALWAYS a good thing?

Stop loss orders are designed to limit risk and automatically take you out of a position when it is moving against you. These orders seem simple on their face but have an aspect to them that is easily overlooked.

A stop loss order is placed in the market and sits there. When, and if, the underlying assets trades at the price specified on the stop loss order, the order is activated. Your order will then be filled as a market order.

The risk here is that the order will not become active if a price is falling or rising and does not trade at the actual price listed on the order. This could allow the market to continue moving against you without your order ever becoming active.

In this case, your milk continues to sour and you may not realize it was never thrown out.

This problem can be overcome using a stop loss market order which serves like a spoiled milk detector. If the stop loss price in this type order is breached at all, it immediately becomes a market order to buy or sell the underlying asset.

When is a “Good ‘til cancelled” order better than a “Day” order?

A good ‘til cancelled order is like using the expiration date on your milk as your guide to freshness. You stick it in the refrigerator or the market and wait.

These orders need to be checked pretty regularly to assure that they are not turning against you while you are not watching. Just like that gallon of milk in the fridge, since you don’t have to mess with them on a daily basis, it is easy to forget them.

The benefit to this type order is that it does not require daily maintenance and will just sit and wait until the market comes to it or it expires.

Day orders are only good until the close of the session in which they are created. The disadvantage to this type of order is that it is closed at the end of trading each day.

If you want to try again the next day, the order must be re-entered. They require just a bit more work than a good ‘til cancelled order. It is a small inconvenience.

The advantage to day orders is they must be re-entered every day. This forces you to check on them and make sure they would still be good. It’s kind of like tasting your milk every day to make sure it is not beginning to turn sour.

All Orders Can Be Good; Any Order Can Go Bad

If there were any one type of order that worked well in every situation, there would probably only be one type of order used.

So many types of orders exist because of the wide variety of market situations that can develop. Even if an order is the right one today, it can go bad tomorrow.

No matter what type of orders you choose to use, the most important thing is to fully understand what makes them good and what can cause them to go bad.

When you understand this before entering an order, you will greatly lessen the odds of having that horrible taste in your mouth when your good orders go bad.

Julia Ellinghausen

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