Hi people,
I would like to know what types of orders are you using for your trade, and which one works best in different market conditions.
For slow markets I always do limit price, targeting mid or a bit closer if against the trend.
The real problem, however, is a fast market: FOK? FAK? Matching the offer? Any advice is appreciated.
You can be impatient and use market orders.
Or, you can be more patient. Use limit orders and hope to get passively filled. Use dynamic trading algos that adjust to what is happening in the market. I trade slowly enough that I allow my algo the entire day to get a fill.
Which is best? It depends on: what size you are trading, what your holding period is, what kind of strategy you are running, and how important costs are to your trading strategy.
If your holding period is really short, then you'll probably need to use market orders so you don't have to wait for a fill. Waiting a minute for a fill when your holding period is only two minutes.
If your holding period is longer you can be patient.
If your strategy is mean reverting, and has a concept of a fair value/buy point and sell point; then you can place limit orders around the fair value and let the market come to you.
If your trade is a stop loss you can't afford to be patient. Get out. Now. Use market orders.
If you are trading in size you will need to be more patient, as the inside spread won't usually cope with your volume. You will need to avoid hitting the market with a sequence of trades that will push the price away from you.
If costs are a big proportion of your expected profits, then you need to screw down your slippage as much as possible. You need to be patient.
Of course, sometimes these are in conflict with each other. If you are trading a short term (impatient) trend following (impatient) strategy in large size (patience is better) it is likely to be very expensive to trade. It is not a question of which order you should use, but more a question of whether you should be trading at all.
So the following is true:
- Slow trend following strategies should be traded patiently with execution tactics that primarily use limit orders. The tactics of larger traders will need to be more sophisticated.
- Mean reverting strategies can be traded patiently, by placing limit orders around fair value. In smaller size these can be very tightly bound and trade very frequently (essentially market making), assuming commissions are not too big. Ocassionally they will get burned, and have to use an expensive stop loss to get out. Larger traders may want to camoflage their full size by not putting it all in the book at once, or spreading their orders further into the market depth. They can't trade as quickly.
- Fast trend following strategies will need to be impatient, submit market orders, and pay the spread. This is an expensive business. Few small traders will have the alpha to make it pay, and no large traders will.
GAT
