Limit Order when Opening a Long or Short Position
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Opening Positions with Limit Orders Back to Articles


Opening Positions with Limit Orders

Entering (opening) a position with a limit order is considered a best practice for many traders. A limit order allows the trader to place an order at a specified price. A limit order can be placed to buy a futures contract or to sell a futures contact.

A limit order to buy would be placed at a price below the current market price. In this case the trader is hoping that the current market price would come down to meet the price of the limit order.

A limit order to sell would be placed at a price above the current market price. In this case the trader is hoping that the current market price would come up to meet the price of the limit order.

In futures trading, your limit order is treated on a first come, first serve basis by the futures exchange. Once you place your limit order, your order is in "line" behind all other limit orders that were placed before you. If the market moves to your price, then you will get your fill (your trade) when all the contracts ahead of your are filled or cancelled and you're next in line. In futures trading, this can happen really quickly.

Note: A buy limit order must get filled before the market can trade at a price lower than your order. Alternatively a sell order must get filled before the market can trade at a price higher then your order. Finally, it is possible that the market can trade at your price on your limit order and not get filled if the market moves away from your limit price and all the contracts in front of you do not get filled. It looks like the market bounces off your price.

Benefits of Limit Orders

A limit order can have a lower "execution cost" then the alternative method of entering a market (opening a position) with a market order. A market order is immediately filled at the next available bid or offer. A market order to buy is filled at the next available offer. A market order to sell will be filled at the next available bid. The difference between the bid and offer is called the Bid/Ask spread or Bid/Offer spread. As an example, a typical difference of the bid/ask spread in the E-mini S&P 500 stock index futures market is 1 tick or $12.50 per contract. That means traders using market orders are $12.50 in the hole at the time of the trade. Which means a market order can "cost" the trader the amount of the bid/ask spread. Alternatively the limit order can be places at the bid (if buying) or offer (if selling) and the $12.50 "in the hole" amount vanishes. A trade with a limit order is executed at the exact price that the trader wants. The only downside is that your limit order might not be filled, as described in the condition above.

Infinity Futures
Ex. bid at 3120.50 offer at 3120.75

Patience

A strategically placed limit order away from the current market price can help the trader take advantage of the natural (and sometimes not so natural) market volatility. However, this requires patience. Especially in the wake of your endocrine system triggering adrenaline which increases oxygen and glucose flow, dilates pupils ... resulting in increased heart rate and excitement. When a trader is excited their emotions are enhanced and can affect decision making abilities.

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Latest Market Price = 3121.00
Limit Order to Buy - 3119.00

Psychological Benefits

In my opinion, it should be considered a best practice to know three things before placing a trade. 1. your entry price, 2. your profit target price and 3. your stop loss price. Entering with a limit order provides traders with a predefined game plan. Once three legs of the trade are placed -- which can be simultaneously accomplished using a simple bracket OCO order on the InfintyAT™ Trading DOM -- the trader can watch the action play out. Alternatively, the trader can get caught up in the allure of entering the market with a market order often on a emotional basis. Have you ever panicked and reversed with a market order to change directions?