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As it is important to avoid slippage and to avoid paying the spread (the difference between the bid and the offer) limit orders are the best orders to use for entering a position. At times you won't get filled and you will miss a trading opportunity, but the cost advantages are significant. Tip: One of the big advantages to electronic trading over the open outcry system is that there is no disadvantage to being a small trader. There is also no problem putting your limit orders just inside the best bid or offer. On the floor it was frowned upon to put a small bid just ahead of a bigger order. So if the market was 6431 bid for 50 and I start bidding 6431.5 for 1, it would be considered poor form. The advantage to me in placing such a bid is that I would get hit by the next sell order entering the pit and if I decide it's not a good trade I can turn and sell the 31 bid. On the screen you can do what you like, there is no peer pressure, no one to keep happy. So an effective way to avoid paying the spread and to increase the likelihood of getting hit, is to place your bid one tick inside the current bid, or place your offer one tick inside the current offer. Of course you can't do this if the spread is only one tick wide. 23 The Pros and Cons of Stop Orders. Stop orders can be used to open a position or to close a position. When used to open a position they are usually for entering a trade when the market breaks out of a range or makes a new high or low. If they are used to exit a position they are sometimes referred to as a protective stop or a stop loss, as they are used to minimize losses. The advantage of using stops is that you can place them in the market ahead of time and if the market trades at the specified price the order will definitely get filled. The disadvantage is that the fill price and the subsequent slippage is unpredictable (and usually significant). Trailing Stops |
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