When you trade commodities, as with any other type of speculation, there are no guarantees. Just as with anything else, you can either make or lose a lot of money, sometimes in a short period of time. It's not as commonly known that there are many ways to both reduce your risk of loss and to limit the amount you lose.
At the most basic level, you need to know the difference between the kind of orders you can execute. These are Market, Limit, and Stop; there are also variations of those three.
Market
Market orders are the simplest ones, and almost everyone is familiar with these. With a market order, you place the order and the broker tries to fill it at whatever the going price is. Even with these requirements, which are relatively loose, there's no guarantee that the trade will be executed expediently.
When liquidity is very low, it may take some time for orders to be filled, even waiting until the next day. With commodities and futures markets, though, market orders are filled within minutes, if not seconds.
Market orders have several variations, including MOC, or Market on Close; MOO, or Market on Opening; and MIT, or Market if Touched. There are also others.
"Market on Opening" means that the order is to be executed at the best possible price during opening; this is also true for a "Market on Close" order, with the difference being that this order occurs at closing.
"Market if Touched" orders are similar to limit orders, which are explained further below. With "Market if Touched orders, orders are filled if the desired price is reached and continue to be filled even when the price moves away from the limit.
Limit
Limit orders are the next simplest type after market orders. Limit orders specifically request to buy or sell at a designated price. Buy orders are typically placed below the current market price and sell orders are above the current market price.
Depending on what the designated price is as well as the general market conditions, you may or may not get your order filled. Even if the market should reach the limit price, thousands of trades get executed every second; thus, you have no guarantee that yours will get filled.
Stop
Stop orders, also known as "stop loss" orders, try to limit potential losses on a long or short position. If you place a buy stop order, this means that you buy above market price and sell stop orders below market price. Once the stop order price has been reached, it becomes a market order and is executed accordingly.
There are a few variations to stop orders, among them stop limit and stop close. There are also a few others.
Stop limit orders have two prices. One price just the ordinary stop order. The second occurs as the limit price. Once the stop is reached, the limit requirement is negated and canceled.
Stop close orders are only in play when the close of trading is about to occur. The order is executed only if the market reaches the stop price at this time. Commodity markets by their nature are volatile, and stop close orders can provide traders some protection from intraday fluctuations.
Fill Or Kill
With this type of order, the floor trader bids or offers up to three times the order's specified price. If a suitable trade can't be done, the order is canceled.
Regardless of the particular order, brokers must obtain the best possible price for their clients. It is true that they can't guarantee there'll be a trade at a given price, but the market is so active and volatile that the overwhelming majority of orders are executed at or very near the client's specifications.
OCO
OCO, or "One Cancels the Other," is actually a combination of two orders. This order requests that brokers attempt to fill it until one of the two sides goes through.
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