If you have not done any trading in futures contract before, placing a buy or sell order for the first time can be a stressful experience. The order placement screen is flashing many figures very fast and there is a possibility of entering the order wrongly. Regardless of the different platforms offered by the different brokerages, the following are the basic concepts to take note of when placing a buying or selling order for a futures contract.
If you want to own the futures contract, you will issue a buy order.
If you predict the price of the futures contract will go up, you will issue a buy order.
If you do not want to own a futures contract, you will issue a sell order.
If you predict the price of the futures contract will go down, you will issue a sell order.
This is the price that other traders are offering to buy from you, if you are holding the futures contract.
Ask Price / Offer Price
This is the price that other traders are offering to sell to you, if you want to own the futures contract.
Bid and offer prices appear side by side. The offer / ask price is the HIGHER price, while the bid price is the LOWER price. This is because other traders want to sell to you at a higher price, and other traders want to buy from you at a lower price.
A way to visualize price is to think of 2 lines for the price. The higher line is the offer / ask price. The lower line is the bid price. And always the prices are quoted from the perspective of the other traders.
Buying or Selling at Market Price
After deciding on whether to buy or sell a futures contract, you can determine the price of entry. If you decide to enter now, you will place a order at market price. That is, buying or selling at the current price the market is offering now.
Buying or Selling at Pre-Determined Price (Stop Price)
However, if you have studied the futures contract price charts and have determined the support or resistance will be the price to enter, you can enter at a pre-determined price. As long as the futures contract price have not reached your pre-determined price, the pending buying or selling order will not be executed. For this purpose, you will use a stop order.
In this example, the market price of the futures contract is 0.8147.
If you want to sell a futures contract at 0.8102 forecasting lower price, you will put in a sell stop order at 0.8102.
If you want to buy a futures contract at 0.8201 forecasting higher price, you will put in a buy stop order at 0.8201.
All Concepts Combined
The following shows the types of orders that can be available at any futures trading platform.
A stop on bid and a stop on offer is an order that will be executed if the futures contract price reached the stop-price. It can be a buy stop on bid or a buy stop on offer or a sell stop on bid or a sell stop on offer.
Once the order is executed, the buy / sell position is opened.
The stop-loss order can be placed with the stop order. That is, stop on bid or stop on offer. If you have a buy position, place a sell stop on bid / offer. If you have a sell position, place a buy stop on bid / offer.
The take-profit order is placed with a limit order. If you have a buy position, place a sell limit order. If you have a sell position, place a buy limit order. The limit order will be executed when the futures contract price reached the price specified by the limit order.
The limit order is very similar to the stop order, except that limit orders are used for taking profits while stop orders are used for setting stop loss.
What if you want to trigger a stop loss order when the futures contract price moves against you, but want to take profit at a specified price when the futures contract price is in your favor? For this purpose, you can place a OCO Limit Order, OCO Stop on Bid or OCO Stop on Offer.
OCO stands for One-Cancels-Other. OCO order allows you to set a stop loss and take profit order at the same time. When one is executed, the other order is canceled.
For example, to get out of a buy position at 0.8102, you can sell at a higher price 0.8190 to take profit, or sell at a lower price 0.8085 to cut loss. A Sell OCO Stop on Bid/Offer order will set the take profit and stop loss prices together.