Stop or If Touched Orders? «

Stop or If Touched Orders?


Traders use combinations of independent orders to make their trades. For most markets, there are several different types of orders to choose from, and traders will choose the appropriate order type depending upon the trade that they are making. For example, a complete trade might consist of a market order for its entry, a stop market order for its stop loss, and a limit order for its target.

Knowing which order type to use in which situation is critical, as using the wrong type of order can have a big impact on how the trade is executed. Detailed information about the types of orders that are available, with descriptions of how each type of order is executed, can be found in my explanations of trading’s order types.

Placing Orders In Advance
Traders often need to place an order in advance of when they want the order to be executed. Exchanges usually process orders in the order that they are placed, so by placing an order in advance, a trader can make sure that their order is one of the first to be executed when the price that they want is available.

There are several different types of orders that can be used to place an order in advance. The most well known are limit orders, stop market orders (usually just known as stop orders), and stop limit orders, but these order types are not correct for every situation. Both market if touched orders, and limit if touched orders should be added to this list, as they are equally as important, and should be used just as often in the right situation.

Stop Market and Stop Limit Orders
Stop market and stop limit orders are used when a trader wants to execute an order at a specific price, but the market is not currently trading at that price. For example, if the market price is 55.06, a trader might place a stop limit order to buy at 56.00. If the market price trades at or above 56.00, the order will be executed, and will be filled at 56.00 (or better if a lower price is available).

However, due to the way that stop market and stop limit orders are executed, they only work correctly when the market price is on the correct side of the order price. For example, if a trader wants to buy at 110.00, and the market is currently trading below 110.00, a stop market or stop limit order will work as expected, but if the market was currently trading above 110.00, neither a stop market or stop limit order would be suitable.

Stop market and stop limit orders are the correct order types to use for breakout trades, where the trader only wants their order executed if the market trades past a particular price. An example of a trading system that could use stop market and stop limit orders for its entry is the Zero Line Cross trading system.

Market If Touched and Limit If Touched Orders
Market if touched and limit if touched orders are almost identical to stop market and stop limit orders, except that they are used when the market is currently trading on the opposite side of the order price. For example, if the market price is 63.26, a trader might place a stop limit order to buy at 63.00. If the market price trades at or below 63.00, the order will be executed, and will be filled at 63.00 (or better if a lower price is available).

Market if touched and limit if touched orders execute the opposite way from stop market and stop limit orders. For example, if a trader wanted to buy at 79.00, and the market was currently trading below 79.00, a stop market or stop limit order would be correct, but if the market was currently trading above 79.00, a market if touched or limit if touched order would be the correct order type to use.

Market if touched and limit if touched orders are the correct order types to use for bounce trades, where the trader only wants their order executed if the market trades back to a particular price. An example of a trading system that could use market if touched and limit if touched orders for its entry would be a variation of the Pivot Point Bounce trading system.

Trading Software
Most brokerage provided trading software (or order entry software) should include market if touched and limit if touched orders, but some third party trading software may not include these order types. When you are choosing your trading software, make sure that it includes all of the order types that you will need for your trading system.

Even trading software that includes the if touched order types, may need to be specifically configured to use an if touched order instead of a stop order. If you find that your trade entries are being executed when you do not expect them to, or are being filled at prices that do not make sense, check that your trading software is using the correct order type, as incorrectly using a stop order is often the cause.

 

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