What are Contingent Orders? And how to use them in your trading strategy

Market orders vs Contingent orders

There are mainly two order types on your trading platform: market Orders & Contingent Orders. A market order is created and sent straight into the market, ready trade. But a contingent order sit ‘outside’ the market, waiting for an event to trigger it (an event that you specify). So contingent orders are used to create market order when certain defined conditions are met.

The 4 different contingent order types

  1. Fixed
  2. OCO (one-cancels-other)
  3. Trailing
  4. If done (for stop loss)

1. Fixed contingent orders

Fixed CO can be used to Open a position when price of a security reaches a pre-defined level (ie Buy 200x CPI if the price breaks above R40); or to Create a stop or limit, where a market order is created to close an existing position when it reaches a set price (ie Sell 100X AGL if it goes below R200). Fixed contingent orders is the simplest type of CO and are used as basic building blocks for more ones such as OCO and If Done contingent orders.

2. One-cancels-other contingent orders

A One Cancels Other (OCO) order uses two contingent orders with different trigger conditions and when either of them trades the other one is cancelled. For example, you buy 100x BGA shares at R130 and specify to take profit by selling if it reaches R200 or stop out by selling if it goes below R100, whichever happens first. When either the take profit at R200 or the stop loss at R100 trades, the other one will be cancelled.

Many trading platforms allow you to specify three prices when you open an order (Buy, Profit & Stop levels) – this then is an OCO order, even though not all trading platforms label it as such.

3. Trailing contingent orders

These CO’s can be used to get out of an existing position by setting a trailing stop loss; or to get into a new position when the market reverses. Say you are in a long position in SOL and want to get out if the price falls by more than 10%. As the price of SOL goes up, the contingent level would also go up, but if the price of SOL begins to fall, the contingent level will stay fixed. If the price of SOL then falls more than 10% your position will be closed.

There is also a Trailing Step and a Trailing Offset. The Trailing Step is what size move in the share price will cause the trigger to be moved. The Trailing Offset is how far you want the stop to be from the current price.

4. If-done contingent orders

If Done CO’s are placed as part of a market order and depend on the market order trading. When the market order partially or fully trades, the contingent orders become active. The simplest example would be that of adding a stop loss to a position, ie ‘Sell 100 NPN if the price goes below R2800′. You could also use different securities, ie If the MTN price breaks above R140 Then Buy 100x VOD at market’.

Putting it all together

Be creative. You can use a combination of the different contingent order types available. As an example, you could say ‘Buy 100x CPI shares of the price breaks above R900, take profit if it reaches R1200 and add a trailing stop loss R50 points below the price.’ To achieve this you would load the following:

  1. A Fixed CO, to trigger the initial buy if >R900
  2. A One-cancels-other order containing:
  3. A Trailing CO for the stop loss R50 below
  4. A Fixed CO for the profit target at R1200

See this in practice

The guide below shows how to load these contingent order types on Iress Trader, complete with screenshots.

CONTINGENT ORDERS

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