How to Use Order Types on Futures

Whether you’re a professional trader or just getting started in the world of futures trading, learning how to effectively use order types can be an invaluable skill. Order types can play a big role in helping you maximize your profits and manage risk, so it's important to understand them and how they work. In this article, we’ll discuss the different types of orders available for futures trading and how to use them to your advantage.

Market Orders

A market order is the simplest and most popular order type for futures trading. This type of order instructs your broker or exchange to fill your trade at the best available price. This means that if you enter a market order with an intention to buy 1,000 contracts of the S&P 500 mini-sized futures contract at a limit price of 3,500, your broker will look for the best available price in the market and fill your order as quickly as possible.

The benefit of a market order is that it provides traders with liquidity and execution speed. However, because the price of the trade may change quickly in a volatile market, the price you end up paying may differ significantly from the price you intended to pay.

Limit Orders

A limit order is the opposite of a market order in that it instructs your broker to fill your order at a specific price. Limit orders are especially useful if you are looking to protect yourself from rapid price movements or take advantage of a potential price dip in the future.

For example, if you have a limit order to buy 1,000 contracts of the S&P 500 mini-sized futures at a limit price of 3,500, your broker will only fill your order if the price drops to that level or lower. If the price never reaches that level, your limit order will remain unfilled.

The benefit of a limit order is that it provides traders with more control over their trades, while also offering them some protection from large price swings. However, it is also important to note that limit orders are not guaranteed to be filled and you could end up missing out on a profitable opportunity if the market moves too quickly.

Stop-Loss Orders

A stop-loss order is a type of order that is used to close out positions if the price moves against the trader’s expectations. This type of order is useful for protecting against large losses, as well as locking in profits.

For example, if you have a long position in the S&P 500 mini-sized futures at a price of 3,500 and you want to protect your profit, you could set a stop-loss order at 3,400. If the price of the contract dips below 3,400, your broker will close out your position automatically and prevent you from sustaining large losses.

The benefit of a stop-loss order is that it allows traders to protect their profits without having to constantly monitor the market. However, stop-loss orders are not guaranteed to be filled, so it is important to use them with caution.

Stop-Limit Orders

A stop-limit order is similar to a stop-loss order in that it is used to close out positions if the price moves against the trader’s expectations. However, the difference between a stop-loss order and a stop-limit order is that a stop-limit order does not guarantee a fill.

For example, if you have a long position in the S&P 500 mini-sized futures at a price of 3,500 and you want to protect your profit, you could set a stop-limit order at 3,400 with a limit of 3,399. This means that if the price dips below 3,400, your broker will look for the best available price in the market and attempt to fill your order at 3,399 or lower. However, if the price of the contract drops too quickly, it is possible that your order will not be filled.

The benefit of a stop-limit order is that it allows traders to set limits on their risk and protect themselves from taking on too much exposure. However, it is important to use these orders with caution, as they do not guarantee that your order will be filled.

Conclusion

Understanding and effectively using different order types can be an invaluable skill for any trader. Whether you’re looking to maximize profits, manage risk, or just protect yourself from large losses, order types can play a big role in helping you achieve your goals. In this article, we discussed the different types of orders available for futures trading and how to use them to your advantage.