Trade Order Timing – Trading
Different timing mechanisms for executing trades
Different timing mechanisms for executing trades
Trade order timing allows investors to set the amount of time a trade order is good for. The different types of trade order timing each have different advantages and disadvantages that play along with the different strategies an investor may have or wish to use. The following are the most common types of trade order timing:
The following is the same list, but reordered in terms of how soon trades will execute under that trade order timing:
The market order is technically not a type of timing, but rather a type of trade order. The nature of the market order, however, dictates that these orders will be executed immediately, at the best available price.
If, for example, a trader wishes to purchase Bitcoin in a market order, and the market is at $2200 per bitcoin, that is the price the trader will receive. The order will complete immediately, up to the specified volume stated in the market order.
This type of order provides the highest liquidity to the trader, but the lowest amount of control. The best available price in our Bitcoin example, in a rapidly moving market could be far from the trader’s ideal price where he hopes to enter the market.
A fill or kill (FOK) order is quite intuitive in its name. By definition, FOK orders will either execute immediately, or be cancelled if conditions are not met. Usually, fill or kills require the whole order volume to be met at a specified price, otherwise the order is cancelled. However, some trades can be set in such a way that partial order volume can be completed, and the rest cancelled. In this case, the trade is sometimes known as an “immediate or cancel” order.
In our previous example, let’s say the Bitcoin trader wants to purchase 5 BTC in a fill or kill order. Only 2 BTC is available at his specified price, so the order is not filled. Thus, it is cancelled entirely.
In an immediate or cancel order, however, the order is filled up to the 2 BTC. The remaining 3 BTC on order is cancelled.
This type of order provides a good amount of liquidity and control for the trader, depending on the specified price. If the trader is willing to forego a better price for a higher chance at completing the trade, she will be met with higher liquidity. However, if the trader is strictly looking for a specific price, the order may be killed if no seller on the market is willing to trade at that level.
A good today, or day order, is exactly as the name dictates. These type of orders are only good for the day they are set, and are cancelled when the market closes if not met. Again, like FOK orders, most orders need to be filled in full. However, day orders can also be set to complete partially, with the unfilled balance cancelled on market close.
Day orders provide a decent amount of control to the trader. A day order is typically not long enough for some unforeseen event to move the market entirely, thus changing the strategy of the trader. In other words, it’s much easier to manage market expectations for a day than it is for an entire week.
In this type of trade order timing, the trader specifies when the order is cancelled, if not completed. This type of trader order will tradeoff control for the duration of the trade order timing. A longer time period will allow the trader a higher chance of the trade being completed, but also a higher risk of sudden spikes or trend changes.
(Courtesy of CEX.io)
Finally, the GTC order. Again, following the pattern of all the other types of trade order timing, the GTC order is quite self explanatory. This order will be active until cancelled by the trader. This works well for diligent traders that are actively managing their orders, and can thus catch wind of any changes in the market, cancelling the order if needed. This may not work well, however, for traders who wish to set their orders and leave them until completed. The danger is that a trader may forget about the order after a period of time but it may be filled at a much later date when the trader would no longer wish to enter the market at the price and direction (buy or sell) specified in the order.
We take the example of a bond exchange, where two traders are managing their portfolios. Both traders want to purchase a 10% 2-Year A-rated bond from Company X. The current market price is $1,543, but the traders wish to purchase it at $1,500, knowing the bond is slightly overtraded. They both set GTC orders for 100 bonds at $1,500.
In the following week, news has it that the company is undergoing financial hardship, and their creditworthiness has dropped. Because of this, there is expectation that the bonds will trade even lower once market opens. One trader cancels his GTC order entirely. The other trader has forgotten his GTC order. On market open, 100 bonds are purchased for his order at $1,500, whereafter the market stabilizes around $1,357. This trader is now in the market at a loss, while the trader who cancelled their order can put in a new order to purchase the bonds at a more favorable price.
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