by Daniels Trading| Futures 101
As any veteran trader will tell you, having your stops run is not a pleasant experience. However, it doesn’t need to be a financial disaster. While the connotation surrounding the word loss is ominous, do not be fooled ― the stop loss order is often a trader’s best friend.
Types of Stop Loss Orders
A stop loss is an order designed to force the closure of an open position at market. If it’s a long position, a sell order is used; if it’s a short position, a buy order is warranted.
The functionality of a strong stop loss order should promote efficient trade by minimizing slippage and facilitating a timely market exit. However, optimizing these two key elements of trade depends largely upon which type of stop traders incorporate into their trading strategy.
Not all stop losses are created equal. Each offers the user a unique collection of attributes. Here are four of the most common and the trade-related areas in which they excel:
#1 Market Orders
A tried-and-true way of entering or exiting a position immediately, the market order is the most traditional of all stop losses. Placing a market order is easy; simply hit the “Join Bid/Offer” or “Flatten” buttons on you trading DOM, and the order is instantly sent to market for execution. Accordingly, any open long or short positions are closed out at the best available price.
Market orders are great for closing positions when time is of the essence. However, be forewarned ― slippage can be significant in exceptionally volatile or thin markets.
#2 Stop Limits
When precision is the primary objective, stop limits are the order of choice. A stop limit order rests at market at a specific price until filled. Unless the order is able to be executed at exactly the defined price, or within a predefined offset, it will sit at market until filled or cancelled.
To illustrate, assume that Archer the crude oil trader is long one lot of July WTI crude oil from $58.06. To protect the open position, Archer places a stop limit order at $57.84 with a defined offset of 1. This means that if price falls to $57.85 or $57.84, the long will be closed out at one of the two prices.
Stop limit orders are most useful within a highly regimented trading strategy. Scalping and other high-volume approaches often rely on the specificity of the stop limit. Nonetheless, it’s important to realize that the stop limit order may go unfilled during times of extreme volatility.
#3 Stop Markets
For a majority of retail traders, the stop market is the go-to stop loss order. It combines the functionality of both the market and stop limit order types, ensuring a speedy exit upon a specific price point being hit.
Like the stop limit, the stop market rests at market until price hits the predetermined level. Upon election, it’s filled at the best available price, as per the market order. This is a useful feature because it guarantees the closure of an open position.
Stop market orders can be extremely useful in volatile markets. In practice, they give the trader an ability to pre-plan a hasty exit from a position under duress. Potentially significant slippage is once again a concern, as it is with traditional market orders.
#4 Trailing Stops
Among all of the stop loss types, trailing stops are among the most advanced. A trailing stop moves in concert with price action, from a defined distance.
Once again, let’s say that Archer is long one lot of July WTI crude oil from $58.06. In lieu of other orders, Archer implements a trailing stop order at $57.91 with a predetermined lag of 15 ticks. As price moves forward, the trailing stop does also, on a tick-by-tick basis.
Trailing stops are valuable to traders who want to let positive positions run, lock in profits, or protect against a market reversal. They are especially receptive to trend and range trading methodologies.
Know Your Stops
Managing active trades in the live futures markets can be a challenge. Sudden spikes in volatility and order flow are common, stressing the need for efficient profit taking or market exit. One way to gain competency in this department is to implement the correct stop loss order for your strategy.
For more information on stop loss orders and other strategic concerns, check out the section of blogs available at Daniels Trading. There you will find valuable information on the various futures order types as well as many other facets of trade management.
About Daniels Trading
Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.
Risk Disclosure
The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.
Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.
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Impressive article! As someone deeply entrenched in the world of trading, I've encountered and employed various stop loss orders throughout my career. This article succinctly covers the essential concepts surrounding stop loss orders and their diverse types.
The article kicks off by emphasizing the significance of managing stop loss orders to prevent financial disasters when trading. It rightly acknowledges that a well-implemented stop loss order can be a trader's best friend. Now, let's delve into the types of stop loss orders discussed in the article:
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Market Orders:
- Description: Market orders are the most traditional and immediate way to enter or exit a position. They are executed at the best available price.
- Application: Ideal for closing positions quickly when time is critical.
- Caution: Significantly susceptible to slippage in highly volatile or thin markets.
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Stop Limits:
- Description: Stop limits prioritize precision, resting at a specific price until filled. They only execute at the defined price or within a predefined offset.
- Application: Suited for highly regimented trading strategies that require specific price points.
- Caution: May go unfilled during extreme market volatility.
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Stop Markets:
- Description: Combines features of both market and stop limit orders, ensuring a swift exit at a predetermined price point.
- Application: Particularly useful in volatile markets, offering a pre-planned exit strategy.
- Caution: Potential for significant slippage, akin to traditional market orders.
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Trailing Stops:
- Description: Among the most advanced, trailing stops move with price action from a defined distance.
- Application: Valuable for letting positive positions run, securing profits, or guarding against market reversals.
- Relevance: Especially effective in trend and range trading methodologies.
The article emphasizes the importance of choosing the right stop loss order based on one's trading strategy. It acknowledges the challenges of managing active trades in live futures markets, underscoring the need for efficient profit-taking and market exit strategies.
To enhance your understanding further, you can explore the section of blogs available at Daniels Trading, where you'll find valuable information on various futures order types and other aspects of trade management.
In conclusion, the article provides a comprehensive overview of stop loss orders, catering to traders of different styles and preferences. For those looking to deepen their knowledge, Daniels Trading offers a wealth of resources and expertise in the field of futures trading.
