Saturday, 6 May 2017

Proper Order Placement

In day trading, trade execution plays a big role and for the trade to get executed it requires us to place the order in time and at proper level.  We also need to place the orders in such a way that it allows us to enter into the trade at our desired price.  Entering into the trade far away from our desired price is not going to serve the purpose of trading.

Here are some guidelines that I follow for placement of orders into the system.

I first find a good setup  to trade.  Once I spot that setup, my next job is to identify a price level beyond which I would like to enter. Almost 100% of the time  I like to enter with SL trigger orders at the identified level.  There are two types of SL trigger orders in India which brokers allow us to do.  One is SL limit order and another is SL market order.   I hope you all are aware of these two order types, so I will not go into further details.  Out of these two types, for entry I always use SL limit order.  For exit, many a times it is safe to use SL market order.  The reason is simple, exit is not in my hand.  Exit is something which markets force me to do, so I will accept whatever price the markets offer me at that time.

1)  Now how to place this SL trigger order.  For Nifty or Bank Nifty is is quite simple.  Usually, trigger price is at 0.5 point away from the level and keeping a 0.5 point of difference between trigger and limit for Nifty is enough.  Sometimes while placing an order for direct BO setup, this difference has to widen to around 1 or 2 points for Nifty and around 5 points for Bank Nifty.

In stocks, order placement will vary from scrip to scrip.  It varies because some scrips are of lets say Rs. 80, some are of around 300, some are around 500, some around 1000 and some even more than that.  For example, if the stock trades at lets say 105, I will keep the trigger at 105.05 and limit at 105.10.  Having said that, sometimes depending upon the volatility of stock, I may not allow any difference between trigger and limit and keep both at the same price level.  For the stock trading at Rs. 450, I will keep the trigger at 450.10 and limit at 450.25 or 450.30.  Similarly, for the stock quoting at 1400, it will be like 1400.5 and 1401.  So here you might notice, depending on the price the stock is quoting at, I will have to adjust my orders.  I cannot keep the trigger order at fixed price and also difference between trigger and limit will vary.

If you are trading in highly liquid cash stocks, placement of orders in this way will work most of time and your order will get executed for normal/average quantity in normal market condition.  However, for stock futures, it is better for us if we also take into consideration the spread between bid and ask price.  Let me discuss it more with an example of Titan future.  Here in the snapshot of my broker terminal (SAS Online), notice I have kept both, price ladder as well as top 5 bids/asks.  As you can see, for the LTP of 494.50 the bid rate is at 494.30 and ask rate is at 494.95, a difference of 0.65 which is not normal.  Now lets assume, the LTP of 494.50 is your trigger level for entry.  You wanted to enter a long beyond 494.40, so you kept a trigger at 494.50 and limit at 494.70.  Now once the price hits 494.5 your order gets triggered, it travels from your broker to exchange with the limit buy price of 494.70.  But it will just stay with the exchange and will not get executed because at that time the ask rate is 494.95 (seller's price).  Now you have two options.  One is either you match the seller's price of 494.95 and buy it at 494.95 or wait for the seller to come to you and sell to you at your price of 494.70.  Instead of doing this, lets assume you were aware of this huge spread between bid and ask that was going on at that point and you were willing to buy even at slightly higher price and with that in mind, you kept your order like, trigger at 494.50 and limit at 495.  In that case, there is high likelihood that your order will immediately get executed.  So in nutshell, it becomes necessary to also take into consideration the spread and adjusting the placement of order or modifying it once the price reaches close to the trigger level for the trade execution.  However, it all depends on urgency of entering into the trade.  Many a times I will prefer to wait for my price.  Rather than chasing the price, I will allow to let go the trade if it does not come to my price.  There are lots of trade opportunities.  If I could not catch this, fine.  There will be always another waiting for me.



2) Another important aspect of reading the price ladder for order placement is to check whether there is any big or good sizable order close to the trigger price.  If there is any big order sitting there, I would wait for that order to get exhausted and then enter.  Let me give you an example of SBI future below.  The LTP is 302.40 and lets assume my trigger level for a long entry is at 302.60.  As you can see in the snapshot, there is a sizable single order for sell at 302.70 of 11 lots.  Now if my trigger is at 302.60 and limit at 302.70, I will be buying ahead of this sell order.  It simply means even after my trade, there will be still big quantity left in the system to sell which will not allow prices to move in my favor for some period of time.  So why not wait for that big 11 lots of sell order to get exhausted and then enter.  So once I notice this kind of order flow into the system, I will modify slightly my trigger at 302.75 and limit at 302.80 or 302.85 to enter after that seller is over with his sell orders.


 Sometimes due to certain market condition, even after taking care of different aspects for placement of order, it is still possible that the orders will not get executed and prices will jump the order.  But that should not stop us in getting our act right.  We need to be always vigilant of what is going on in the order flow side so that we can better position ourselves.  Remember, there are plenty of setups happening all the time.  If this stock does not allow me to enter, there will be always another one waiting for me.

Hope this post helps you in your order placement and better order execution.

If you are eager to check out the performance of stock trading for month of May 2017, you can click here.

8 comments:

  1. Thank you so much for your nice explain URD..
    Now i realised why not executed our orders..!!

    ReplyDelete
  2. Thanks for the article.
    I just saw your SF May 2017 excel sheet, You were just scalping for 1,2 points by entering big positions.

    I think in this way, Brokerage and taxes will eat most of the profits, Can you post the net PnL after all expenses (Brokerage,Taxes, etc).

    ReplyDelete
    Replies
    1. Srikanth

      It is not scalping. I am trying to capture the next half an hour move which is actually more than enough in this morning session of trading.
      All trades that are recorded are of one lot only, so not big quantity.
      Trading cost comes around RS. 200 per trade. So do some calculations on your own by deducting Rs 200 to get the net profit per trade.
      URD

      Delete
    2. Thanks for the clarification.

      Delete
  3. Sir can you tell how to see price ladder on left side you post

    ReplyDelete
    Replies
    1. Rocky

      If you are using NEST terminal, you can view it by clicking on market/price ladder on tool bar. Once it opens, drag it to the left side corner.

      URD

      Delete
  4. Relying on DOM can be very tricky due to Algos and institutional iceberg orders. Moreover, Algos can pull back or introduce at high frequencies. A video if possible showing the approach would be of great help.

    ReplyDelete
    Replies
    1. Anon

      DOM is used to read the order flow at the time of entry to fine tune it a bit. If you use the DOM for decision making, whether to take the trade or not based on order flow only, then all these issues like Algos come into the picture.

      URD

      Delete