I think some common trading mistakes could be easily avoided if more traders understood the concept of time in force…
I’m talking about a special category of time-based stock market orders. Time in force orders involve instructions that indicate how long the order will stay active before it’s executed or expires.
Confused? That’s OK. For newbie traders, understanding all the different order types available can be overwhelming.
That being said, there are several reasons why every trader should be aware of time in force…
The good news is that I’m here to help. I think I’ve executed every kind of order imaginable over my 20+ years of trading. Now you can learn from me about time in force (and maybe a little bit about golf as well)…
What Is Time in Force?
Time in force refers to a specific time parameter that traders can place on stock market orders.
Many retail traders who trade small amounts of high-volume stocks are unfamiliar with the variety of order types available to traders.
These traders haven’t needed to understand time in force, because their day orders for AAPL, TSLA, and AMC always get filled immediately. They click buy or sell and let their brokerage do the rest.
But if you get into more active day trading (especially with a larger account size), time in force will become a critical factor to consider when placing an order.
For example, if you place a market order for 100 shares of AMC — you almost always get filled instantly. But if you place a market order for 100,000 shares of AMC — you’ll probably get filled in batches.
If 50,000 shares get filled early in the day at a price you’re happy with, you probably don’t want to leave the other 50,000 sitting in an open market order. If the price fluctuates, which is known to happen with AMC, you could get filled at a much higher price than you anticipated.
No experienced trader would do this. They’d instead use time in force to get the best possible execution.
What Is a Day Order?
A day order will remain active until the close of that trading day. This is the order that 99% of brokerage platforms set by default.
Day orders can be useful for brokerage platforms or investors looking to pick up shares for the long term, but they aren’t usually the best choice for active day trading.
I know it’s confusing. You’d think day traders use day orders, right? Let me explain…
There’s a logical reason why day orders don’t make sense for high-volume traders. If you trade several tickers in a day, it’s dangerous to leave day orders open. You could easily forget one of them and it could trigger later. If this happens at the wrong time, it could ruin a different trade you’re in.
That said, day orders are still the most well-known and widely-used orders in the stock market.
Types of Time in Force Orders
Let’s take a look at some different types, how they work, and why traders might use them…
Fill-or-Kill Orders (FOK)
FOK orders are best if you’re trying to avoid partial execution of your order.
With a FOK order, the order will only go through if the entire amount can be filled all at once, so you won’t get one batch of the order filled now and another batch filled later.
This can be helpful to active day traders. Prices fluctuate quickly, and day traders usually want to execute the trade right then or not at all.
Good Till Canceled (GTC) Orders
GTC orders are good until you — wait for it — cancel them. These orders can sit open for years if you don’t manually close them out.
GTC orders are useful if you have a specific price where you’d like to buy a stock but don’t know when the share price will reach your desired level.
If you’re willing to buy the stock at this price — at ANY time — then a GTC order may be your best time in force option.
Immediate or Cancel (IOC)
An IOC order, also known as an accept order, executes all or part of the order immediately, then cancels any unfilled portion.
IOC orders can eliminate the need to manually cancel any unfulfilled batch. You won’t be punished later in the day (or week) for an order slipping your mind.
Good Until Date Order (GTD)
A GTD order will stay active until a chosen time or date.
GTD orders can work in situations where you want to buy or sell a stock only before a specific date.
For example, let’s say you wanted to buy 100 shares of NFLX, but only if you could get them before an earnings report scheduled for one week later. In this scenario, you could create a GTD order that’s good until the day before the report.
How to Use Time in Force Orders
There are many ways traders can put time in force orders into action. But there’s no one correct way to use them. They can potentially apply to a large variety of trading plans.
How you should utilize time in force depends largely on your trading mindset. Your account size, the average time you spend in a trade, and your overall risk tolerance all factor into how you may best use them.
Before we get to some specific examples, let’s briefly discuss some general order types…
Market Orders
Market orders execute at the current price, regardless of the price.
While they may be fine for casual investors purchasing shares for the long term, you won’t see smart active day traders using market orders. By definition, they don’t provide traders with the best possible price execution. If you send a market order, you’ll likely get filled at a subpar price.
Poor execution is usually unacceptable to experienced traders, and for good reason. Remember … only price pays.
Limit Orders
In contrast to market orders, limit orders will only fill at a specific price (or better). If you actively trade, you should use limit orders 99% of the time.
Limit orders allow traders to set their own prices. If you want a stock for $150, but it’s currently trading for $155, you can set a limit order at exactly $150.
When executing limit orders, you won’t have to worry about getting filled at a subpar price, because the order will only trigger if it can be filled at the price you requested.
Stop Orders
Stop orders are similar to limit orders — both are affected when a stock passes a determined price.
The difference is that with stop orders, the order will trigger once your stop loss level has been reached. On the other hand, limit orders will attempt to execute the entire order as soon as your limit price has been reached.
Stop losses do just what they advertise — they help stop traders from losing. If you’re disciplined and meticulous with setting your stops, you should never lose more than you can afford.
Examples of Time in Force
It’s difficult to get limit orders filled on certain stocks during specific periods of trading. This can happen for a variety of reasons.
Sometimes the available float is so small it’s hard to get filled on high-volume trading days. Other times, your order could sit unfilled for hours because it’s 1 cent under the ask price.
By default, most standard market or limit orders are day orders. These orders stay active until the close of that trading day.
In many situations, day orders work fine. But they can be a serious problem if you send one in the morning and forget about it, only to have it filled during the final moments of trading (when prices are volatile and you least expect it).
In contrast, other time in force executions work like ticking time bombs strapped around your order. You set the timer and choose how long your order lives.
This can be a helpful tool if you want an order filled at a specific price, but can’t get the fill you’re looking for at a given moment.
You don’t want to be doomed to staring at that one chart all day, adjusting your limit order by single cents in a desperate attempt to get filled.
By understanding time in force, you can utilize the best order type for each particular setup.
Frequently Asked Questions: Time in Force
What Is Time in Force on Close?
An at-the-close order will execute at or near the close of the trading day. You can set up an at-the-close order for any of the previously mentioned time in force options. For example, if you were looking to snatch up a specific amount of shares near the end of the day, you could place a FOK at-the-close order.
What Is a Day Order?
A day order is an order that will cancel if it isn’t executed by the end of that trading day. This is the most commonly used type of order in the stock market. Most brokerage platforms set trades as day orders by default.
What Is Time in Force Immediate or Cancel?
Immediate or cancel (IOC) orders execute all or part immediately and then cancel any unfilled portion of the order. IOC orders do some of the housekeeping work for you. They remove the need to manually cancel any remaining portion of an order that wasn’t filled.
What Is Time in Force in Investing?
Time in force orders are more commonly used by active traders than casual investors. If you plan on holding shares for years or decades, what difference does a subprime fill price make? In the grand scheme of investing, it doesn’t matter if your cost basis is a few handles higher or lower. But for active traders, a few cents difference on a penny stock can materially affect the upside of the entire trade…
Time in Force: Conclusion
You should now have a clearer understanding of what time in force orders are, how they work, and why traders use them.
Just like golfers use different clubs depending on the hole in front of them, experienced traders use time in force orders depending specifically on the type of trade they’re in.
Take it upon yourself to analyze some time in force trades. Backtest your results. Don’t be lazy. Do your homework. STUDY!
If you really think you have what it takes, consider applying for my Trading Challenge. Don’t just take it from me … some of my most successful students of all time started there.*
And think about this — you don’t see any professional golfers hitting the links without their pitching wedge.
The same goes for active day traders and time in force orders. You should be familiar with every type of order available to you, and be ready to use any of them if the perfect setup presents itself.
What do you think about time in force orders? Let me know in the comments — I LOVE hearing from my readers.
Disclaimer
*This level of successful trading is not typical and does not reflect the experience of the majority of individuals using the services and products offered on this website. From January 1, 2020, to December 31, 2020, typical users of the products and services offered by this website reported earning, on average, an estimated $49.91 in profit.
The post Time in Force: What It Is, Types, How to Use It, & Examples appeared first on Timothy Sykes.
