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Dave asks: “Can you talk a little about order types? Market, limit, and stop orders? Do you work your orders overnight? Do you ever cancel like a stop before it is hit? Thank you.”

A good, practical question, and the answers can be pretty cut and dried. For simple, directional trades (more complicated in spread markets), there are really only two order types you need to be concerned with: stop (maybe stop limit), and limit orders. There are no true market orders in many markets, so a market order is essentially a limit order that “goes through” the bid/ask price. (E.g., market is 10.00 at 10.03 and you are buying–enter a buy limit order for 10.25. This will be executed immediately and is basically a “marketable limit” order.)

With that out of the way, stop orders can be used for two things: 1) getting into trades (on breakouts or other “go with” type entries) and 2) protecting open positions. Limit orders are generally profit taking orders, on whole or partial positions. None of this needs to be overly complicated; just think about what you’re trying to do, where you would like to execute, and use the correct order type to get it done. A common rookie mistake (that we’ve all made) is entering the wrong type of order. For instance, a stop order on the “wrong side” of the market that executes immediately or is rejected by your software. If you trade a lot you will make that error at some point, but it should not happen often.

As for the “overnight” question, realize that overnight applies to out of regular trading hours for the market you are trading. Sometimes dumb things happen in these overnight markets, with strange prints far outside the daily range. My thinking is that I want to be able to profit from mistakes other people might make, but I do not want their errors triggering my stop orders. Generally, I work limit orders “24 hours” and stop orders day sessions only, but there may be some exceptions for commodities that trade heavily overseas. If you are a trader who has resting profit target orders, try working them in overnight markets. You will get some very nice surprises and happy fills.

As for canceling an order, the answer is very rarely. One firm rule is that I get into trades (usually all at once) and place an initial stop that defines my 1.0R loss. That stop can never be moved in the direction of risk or canceled. Again, do this long enough and you’ll have some nasty surprises. You will lose more than you thought you were risking on the rare trade, but it should not happen often. And it certainly cannot happen because of your actions! In other words, you can’t cancel this order and let prices slip past it while you watch the loss grow to greater than 1.0R. If you are inclined to do that, get out at the stop and enter a second trade. For discipline and consistency, this is a much better practice. (But one that should probably not be done that often–wrong is wrong.)

There might be times I might cancel a profit taking order if I think it will be hit on good momentum intraday. That requires some careful massaging, as it’s not really ok to cancel the order and then end up exiting at a worse than anticipated price very often. Whatever actions we take should add to the bottom line over a reasonably large sample size, so make sure what you’re doing makes sense. There are also times that I will work a stop order on a close only basis (meaning the order will only be elected if the closing price is at or beyond the stop price), but this is also a practice that can leave you open to significant slippage. Pick your spots carefully.

In general, keep it simple: Use limit orders to take profits (partial or complete) and work them 24 hours. Use stops to either get into positions or protect existing positions and don’t work them overnight. There are exceptions, but there are not many exceptions.