Using Different Types of Orders to Manage Risk in the Commodities Market

July 8, 2009 by  
Filed under Commodities Trading

Any type of investment does not guarantee profits or gains, no matter how informed and speculative you are. Some trades may be devastating losses, and others may call for a celebration. Overall, the advantage of employing certain types of orders will help to manage your risk level and maintain any gains you do experience in the commodities market.

Market, limit, stop and other variations are the most common types of orders used when trading commodities. Market orders are placed with your commodity broker, and he or she attempts to fill your order at the current market price. Sometimes it is executed immediately, and sometimes the price may change somewhat before the order is carried out. This speed is all dependant upon the liquidity of the commodity; it may be completed in minutes or take an entire day.

Variations of market orders also exist, including Market on Close (MOC), Market on Opening (MOO), and Market if Touched (MIT). MOO executes the order during opening of the market, and just the opposite happens with an MOC. MIT orders are much like another type of order, called a limit order. However, these are filled if and when the specified price is reached, and continued to do so even after it moves away from this amount.

Limit orders ask your commodity broker to commence a buy or sell action on your behalf at a pre-determined price level. Buy orders are usually placed below the current market price, and sell orders placed above it. These orders may or may not be filled, depending upon what the market does. When your specified price is reached, thousands of other commodity trades may need to be executed first, thus possibly eliminating the ability to fill your limit order as well.

Stop orders, also called ‘stop loss’ orders, are used to hedge investment dollars and reduce the risk of incurring significant losses. You may request a buy stop order above the current market price, or a sell stop order below it. If the order price is met, it is automatically converted to a market order and executed as stated above.

Some variations of stop orders exist as well. These include stop limit, stop close and one cancels the other. With stop limit orders, you specify two different price points to your commodity broker. If your selected commodity reaches one price as a stop order, the other, or limit price, is cancelled out.

Stop close orders are typically entered near the end of a day’s trading period. These are employed to prevent being exposed to volatile fluctuations during the day, and allow the order to be carried out if the stop price is reached during this ‘closing’ time.

One cancels the other orders combine two different orders into one in order to manage risk and benefit in different scenarios. Once one of these orders is filled, the other is cancelled, or vice versa. This type of order is especially beneficial to prevent major losses and in markets where speculation and direction of the market is unclear.