Using a Limit Order Puts YOU
...In Control

Wouldn't you rather trade as precisely and profitably as possible
...rather than let the market determine when your trade entry and exit orders are filled?

The Limit Order allows you to do just that.

This becomes even more important in fast moving markets, or in situations when commodity futures and futures markets become highly volatile and agitated.

In this section/page, we'll acquaint you with the differences between a market and a limit order, when to use each type, respective benefits and disadvantages of both order types, and another version of stop order....the stop limit order.

On this page we'll cover:

- Definitions of Limit Orders, a Market Order and a Stop Order
- Stop Orders versus Limit Orders...How They Work
- Benefits of Using a Limit Order
- When to Use Them?
- Volatile Markets Warrant Using Limits
- What is a Stop Limit Order?

Different Orders, and How They Work

What is a limit order?
They're a type of trading order that stipulates the EXACT price point ("or better") which you are willing to payto enter or exit a futures trade, giving you precise control.

But, because you are "limiting" the price...(unlike with a buy stop or sell stop order)...at which you want to enter or exit a trade...this type of order MAY or MAY NOT be filled, potentially excluding you from a trade you'd like to get into.

With a regular buy stop order or sell stop order, your trade is triggered once the "stop" price has been hit or exceeded.

==> A buy stop order is placed above the current market price when going short (expecting fall prices).==> A sell stop order is placed below the current market price when going long (expecting prices to rise).

Once the buy or sell stop price is hit and triggered, your buy or sell stop order becomes a market order..and market orders are processed to be be filled immediately at whatever the market price.

There is no price limit your buy or sell stop order must be filled at. You might be filled at your stop price, or higher...potentially costing you a poor fill and moreexpensive trade entry or exit. A distinct disadvantage from using the limit type of order

What does being filled at "or better" mean?

Within the context of our what is a limit order, let's clarify what being filled at "or better" means.

As an example, you are willing to pay a maximum of $37 - your "limit"
...to enter the market.

The current commodity price is $35, when you place your limit order. Assuming there are willing sellers, your order could be filled immediately at $35, or at any point up to and including $37.

That's what 'or better' means....you're basically stipulating that your order be filled at $37 or less ("better")...or not at all.

If the market jumps (gaps) above $37, or the price moves past $37 to quickly, your order won't be filled. You'll miss entry into the market.

BUT, you were willing to risk that, because you chose not to pay more than $37 to enter the trade. So, you begin looking for another trade opportunity.

To recap - the main differences are:

A). Your Market order (your former stop order, whether buy stop or a sell stop order) will ALWAYS be filled, at "the market" or current price at which it is executed.

B). Your Limit Order may or MAY NOT be filled. But if it is, it will never be for more than the exact maximum fill price you stipulated.

Benefits of Using a Limit Order

It helps ground you in a less emotional, business-like and calm trading state. Should your order NOT be filled, you learn to relax, knowing there will always be another trade coming down the road. You remain unemotional, detached, and in control.

Using an entry limit order helps one avoid not "chasing" a trade"....and the accompanying emotional reactions such as, "get me in at the market, at whatever price, I don't care"...that can cloud trading decisions.

Knowing the max price you're willing to go into a trade at...or not at all...helps to keep the Greed Monster and his disruptive, distracting and potentially paralyzing feelings,in check. Greed can and will kill you in trading.

This helps you mentally adjust away from greed-based feelings that can hurt you in futures trading. Feelings like:

"What happens if I miss this trade?
Or...It may be a long time before I have this chance again"
.Or..."I better get in now".
Or..."But what, what if I'm wrong?"
Or..."What if the market moves against me?"

When to Use Limits

You absolutely want to use "limits" when faced with:

- A fast moving futures market
- Volatile commodity trading conditions exist
- Forthcoming and potentially reactive fundamental futures news
- Choosing to trade in an illiquid markets (smaller trading volumes, not a lot of buyers/sellers)

Illiquid markets (an example are some of the rare metals markets) can cause you to get stuck getting in and/or out of trades. They can also be prone to prices "gapping" up or down with little trading in between.

(Price gaps or gapping is when a price moves several cents or points in a single bound...with no trades occurring at any points between).

Stay away from illiquid markets - there are many others far more liquid that have good trading and money making potential. But should you choose to play there, ABSOLUTELY use "limits" in this type of market...NOT a market order.

In each of the other above noted situations, a specific commodity's price may move very rapidly in one of both directions, fluctuating wildly, depending on a number of factors at a specific point in time.

Unless you have a cast iron stomach and are an adrenaline junkie, it's best to step out of the market at (or before) these times...or not play in these types of market conditions at all.

Doing so, you avoid getting 'whipsawed' out of trades, and avoid incurring potentially very large losses by being caught in a market moving so rapidly and far against your position that you can't exit fast enough.

Being on the plus side of a volatile market move could reap huge gains, and you could be very tempted to chase profits when faced with this situation.

BUT, remember...conservative trading cowboys usually have a longer trading lifespan than tradinggunslingers. Using a limit orders is definitely more conservative, and a smart way to trade.

What to Use in Volatile Markets

These factors can include unsettling market news like a radical change in weather impacting crop yields, a major hurricane in the Gulf threatening oil production, a key commodity producing countries political instability or a declaration of war, among others.

The increased market uncertainty affected by the fundamental events/factors at work, causes trading and thus the affected commodity prices, to react in a sometimes extra-ordinary manner.

This often drives commodity market prices into broad ranging and sometimes wildly fluctuating prices (both up and/or down) beyond your preset stop order price point.

This can potentially result in your stop loss order not being triggered when hit, and getting stopped out of the market at a less advantageous level (costing you money).

Beware of Getting Caught in a Limit Up/Down Move
In rare and usually volatile futures market situations, cases, the commodity price may go 'limit up' or 'limit down'...moving the maximum number of points or cents allowed by the exchange, after which all trading is halted until the next day's session.

Sometimes this phenomenon occurs right off the opening trading bell several days in a row. This is known as the market going "locked limit".

Being caught in a limit move against your position can be very damaging to your financial and trading health.

For more detailed info on Limit Moves, click here

If you choose to play in this type of volcanic trading environment, using a limit order for trade entry or exit is the smartest way to go.

You may miss out getting in on a trade(s), but you won't get caught up in the stress and panic-filled moments this type of wild market dynamic creates....and the accompanying potential trading mistakesyou may make as a result.

Or better yet, leave the fast moving and more volatile futures markets arena to the big boys.

The Stop Limit Order

This type of order is what is sounds like - a combination of the features of both a stop order and a limit order.

How does a stop limit order work? We'll it turns into a limit order (to buy or sell) at a specific price or better, IF and WHEN the stop price point is reached.

Here's an example:

Gold has been trending in a sideways pattern and lower for awhile, from $615 down to around $600. You feel Gold prices are ready to fall even more, but you want to see them start to movein that direction before you decide to short the market.

You put in a stop-limit order to sell with the stop price at $585 and the limit price at $583. If Gold breaks below $600, then continues and hits $585, your stop-limit order is triggered, turning into a limit order.

Assuming conditions allow, you'll be filled and short the market (betting on falling Gold prices) somewhere between $585, but not lower than $583.

And if the market for some reason experiences a very rapid move at that point, or suddenly gaps down from $585 to below $583 (no trading between these prices occurring), your order won't be filled.


To return to the Home Page from the Limit Order page, click here



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