CFD Orders: Limit, Market, Stop Loss and Conditional Orders

Depending on your provider, there will be a whole host of risk management tools available to you should you choose to open up a CFD portfolio including:

Limit Order

A Limit Order consists of an order placed outside of the present market bid or offer price. For instance, if the present offer price for Apple CFDs is $150 and you would like to sell them at a higher price, say $153.50, you can put an order to sell your stock CFDs at a limit price of $153.50. Should the price reach your limit price, your order will be normally executed. However, in situations where there is an insufficient quantity available at your limit price, your order may not be executed (or you may receive a partial fill if trading with a direct market access broker). In such a circumstance, your order will part-fill and your residual order will remain open at your limit price.

Stop Loss Order

Stop Loss Order – an effective way to manage your risk is with a stop loss order which will take you out of a trade when the price of a CFD moves against you. This tool is easily used through your online account and should help to marginalise risk.

Guaranteed Stop-Loss Order (GSLO)

There is another type of stop-loss order that guarantees your exit price despite price gaps.

You have a long trade on ABC stock CFD for 10,000 shares and you have already made some unrealised profits. You don’t want to close the trade but you have to be away on a holiday. You decided to put a Guaranteed Stop-Loss Order to protect your profit and to ensure any losses will be limited:

ABC stock CFD price = $5.00
Long position of 10,000
GSLO set at 5% of CFD price = GSLO set at $4.75
Price goes to $4.20 while you were away
GSLO would have you taken out at $4.75 even if it reached $4.20.

Market Order

A Market Order is a type of CFD order placed and executed at the current market price. Your gain or loss on the trade depends on the rise and fall of the market.

A Stop-Loss Order consists of an order placed with the aim of capping the potential loss of an open trade. When triggered the stop loss order closes out the trade at the designated price level and prevents the possibility of losses to continue accumulating in the process. Please note that normal stop loss orders are not guaranteed and in certain (rare) situations the market may rapidly fall before the order can be executed leaving your original position open.

Conditional Order

Conditional Orders is all about anticipating potential losses and liabilities before they bite you and taking steps just in case they do. One popular conditional order is the ‘OCO’ which stands for ‘One cancels the other’. You can even link an ‘if done’ order to an OCO to automate the profit taking process. This involves you placing two orders in the market in such a way that if one gets triggered the other order is automatically cancelled thereby allowing you to both input a stop order and a limit order at the same time. If the market rises and hits your limit price your CFD trade would be closed at a gain, with the OCO cancelling the stop order – in this way avoiding the risk of the market turning and triggering a new short trade.

One Cancels the Other – this is a type of order which can link two separate trades. Usually it is an order linked to a stop order.

If Done Order – similar to an OCO order but it links two orders together and when the first is carried out, the second is automatically done too.

Here is a trading plan for a CFD trade which includes more strategy orders than most CFD traders would consider for multiple positions -:

A investor is monitoring the February Brent Crude Oil future contract which is presently hovering at the $85 price per barrel. The crude oil price has been rising in the last few months but the trader is still confident that the oil price will keep rising although he believes that there is the possibility of a short-term retracement to $80 before the rise continues. Having checked the charts in detail, the trader reckons that the price could well climb to the $97 level before finding strong resistance. However, he’s concerned that a pullback to $76 might lead to a further fallback to $66 and he doesn’t want to keep the trade open should that scenario materialise. The trader could place the following order:

Buy £10 of February Brent Crude Oil at a limit price of $80.00 If done, sell £10 at $97.00 limit, OCO $76.00 on stop – all GTC (good till cancelled).

This strategy includes a limit, stop, contingent order and an OCO – all worked ‘GTC’ (good till cancelled). The setup includes a limit order to open a trade should the oil price pullback to $80. Contingent to this order being executed there is a limit order to close the trade at a profit should the oil price hit $97. Moreover, there is also a linked contingent stop to close the position if the market moves against the speculator and hit $76. This will protect the trader against losses continuing to accumulate should the market keep moving in the opposite direction to the original trade. This combination of orders represents an OCO order: if the limit order of $97 were reached first, then the stop loss at $76 would be automatically cancelled.

This is a very good risk management tool in situations where your limit order is executed and you are away from your desk, because you already have appropriate protection mechanisms in place.