Many traders are familiar with the market order and the stop loss order, but perhaps less so with a limit order.
A limit order can be used in two different ways on the Nadex platform. First as an order to get us into the market at a better price than the one being quoted, and second to set a take profit order to close out before expiry. This gives us complete control over where and when we get into the market, and also in setting the automatic take profit targets, if required.
On many occasions the market will reverse on minor pullbacks on a longer term trend, but using the limit order offers the flexibility to set our own entry price based on the analysis of the underlying chart and associated price action. Here is an example of another order ticket to see how this works in practice.On this ticket we have a weekly contract for Soybeans. The underlying market is currently trading at 1302.35, but we believe this is a good probability trade given the technical picture and the time to expiry.
The quote on the offer is currently 36, but we would like to enter the market at a better price. Having looked at our charts we believe that whilst the longer term is bullish, the price action and volume analysis is suggesting short term weakness. Rather than enter at 36 we decide we would like to enter at 31, allowing us to get into a stronger position and generate a higher return. In the price window we enter 31.00.
The profit and loss window now reflects this change with a maximum loss of $31, and a maximum profit of $69.However, when we place the order this does not become an Open Position live in the market, but instead is known as a ‘Working Order’. A working order is one that is waiting for a limit order to be hit. This order will now be triggered when the market reaches our desired price point for entry.
You can think of the limit order as a ‘pending order’, waiting for the market to touch the price you have set.You can apply the same approach to creating a ‘take profit’ order. Suppose the above order has been live for a few days, but we see some longer term weakness now appearing on our charts, or perhaps some fundamental news has resulted in a slow down of the bullish momentum. We still believe the option will close above the strike at expiry, but want to close the position completely at a certain level, or partially close the position.
Again this is done using the limit order. All we need to do here is the reverse. We place a sell order at say 85, and click the Place Order button. This becomes a working order, and will only be triggered into a ‘take profit’ order when the option hits the sell order price level. The take profit order would then close the position. The main points to note are these:We do not need to close the whole position. If we have 10 contracts we could place a limit order to close 5 at one price and leave the remainder to expiry.
Alternatively, we could create two or more take profit orders to close out in steps as the market moves higher The process is identical if we have opened with a sell order We have to make sure we sell or buy the same contract to close or take profit. In the futures and options world to close a position requires placing an order opposite to the open position. An open buy position is closed with a sell order, whilst an open sell position is closed with a buy order. We are then square the market.
With so many contracts in the option ladder, it is very easy to select the wrong contract to close a position Using limit orders in this way is an elegant approach to managing any position in the market. And in the binary options world a stop loss is redundant.The other term which we came across on the ticket was GTC, which is simply Good Till Cancelled. All this means is exactly what it says.
The order will remain a working order until it is either cancelled or becomes a live position in the market when triggered by the price hitting the limit order price specified on the order ticket.Let me try to summarize the binary options marketplace at present, and also point you to another exchange which has been offering these instruments for some time.
As I explained in my introduction this is an extremely fast moving market. In writing the first few chapters I have tried to outline in an unbiased way, what I believe are some of the pros and cons of trading using a fixed risk approach. We are going to consider the whole business of risk/reward ratios and percentage returns in the next chapter, but the point I want to make is this.