Time In Force For Orders Trading: Complete Guide To Use It Best

Trading concepts

Time in force

What Is Time In Force?

Time in force is a unique instruction used when setting a trade. It shows the period an order will stay active before it is completed or terminated. These alternatives are definitely crucial for active traders and enables them to be very precise about the time parameters.

Time in force shows the period an order will stay active before it terminates with your broker.

Time in force for an option is achieved using diverse order types.

Popular examples of time in force specifications are: day order, immediate-or-cancel (IOC), fill-or-kill (FOK), or good-’til-canceled (GTC).

Basics of Time In Force

Time in force orders are useful means for active traders to avoid themselves from unintentionally completing trades. By putting in place time parameters, they wouldn’t need to remember to terminate old trades. Unintentional completed trades can be really expensive, if they happen during market changing conditions when prices are quickly changing.

Major active traders adopt limit orders to regulate the price in which they use to acquire a stock. It means that they place a time in force option to regulate the period in which the order remains open. While day orders remains the most popular type of order, there are numerous situations when it would be more logical to adopt other order types.

There are numerous diverse types of time in force orders that traders can adopt. Some brokers only give a limited set of order types, but active traders usually are provided with more choices. Most brokers adopts acronyms like: DAY, GTC, OPC, IOC, GTD, and DTC to make reference to these orders. We will observe these order types at a more close range below:

Example of Time in Force

Shawn is of the opinion that the price of stock XYZ, which is recently trading at $10, will shoot up after some time period, precisely in three months’ time. He bought XYZ call options with a strike price of $15 and applies a Good ‘Til Cancelled (GTC) order. To prevent the order from staying infinitely on hold, he applies a three months limit on the order. Stock XYZ’s price is still struggling after three months to break beyond the $12 level. Shawn’s order is terminated automatically.

When to Cancel an Order Based on Time in Force

Time in Force is only applicable to limit orders. Then you come to a conclusion that you will not pay the market price and have a suitable price in mind.

When you place a limit order of any type (Stop Limit or simply Limit), you’ll be asked for the time you intended for it to expire.

Types of Time in Force Orders

There are various ways to adopt time in force orders in your trading techniques. Below are some of the Order types implemented by traders:

Day-only order (DAY)

This is an order to buy or sell a security that’s viable alone for the current day’s trading period. If you apply a day order and it fails to be executed by the end of the trading day, then it’s instantly gets terminated. Day-only orders are usable if you intend to trade a security at a specific price mark without the need to observe its price through the entire trading day.

Fill or kill order (FOK)

This form of order has basically two outcomes: either fill the whole order instantly or terminate it. You would implement this type of time in force order if you trade more actively or at a higher volume. The aim of this form of order is to assist you to finish a larger trade at a specific price point, as opposed to purchasing shares of similar security at diverse prices.

Good until canceled order (GTC)

This form of order allows you to instruct your broker to buy or sell assets at a certain price until you indicate that the order should terminate. Your brokerage may provide you with a specific time frame in which to complete or terminate these orders, which can span from 30 to 90 days. You may use this form of time in force order if you intend to hold out for a certain price on a security before completing a trade. If the security fails to reach that price, you can terminate the order or wait for it to expire.

Immediate or cancel order (IOC)

These are closely related to fill or kill orders but with one major difference. With fill or kill, the order must be terminated if the whole order fails to get filled instantly. With immediate or cancel orders, the part of the order that can be filled instantly is filled. Any remaining shares would then be terminated.

Good until date order (GTD)

These let you indicate a specific date for completing an order or enable it to expire. This provides you with a slightly more assurance over when the order will close, versus a good until canceled order. If you’re day trading using an online brokerage, your broker may suggest which form of time in force orders you’re able to place.

How to Use Time in Force Orders

Time in force orders can be incorporated with other forms of orders to run your investment strategy. For instance, you can combine them with:

  1. Market Order: this is an order to buy or sell a security at the most desired available price. Most market orders are basically day-only orders. The aim is typically completing the trade as rapidly as possible at the most desirable price. If you’re day trading in a brokerage account, day-only may be your default time in force order setting.
  1. Limit Orders: are also orders to buy or sell. They come with one warning: In order for the trade to be completed, it has to be at a certain limit price or better. Buy limit orders usually instruct your broker to buy a security at or beneath the current market price. Sell limit orders instruct your broker to sell securities at or above the current market price.
  1. Stop Orders: they allow you instruct your broker to buy or sell securities as soon as they’ve hit a certain stop price. Stop orders can be incorporated with good until date orders or other time in force orders as a means of controlling price volatility.

Conclusion

When applying orders, it’s vital to consider the period you intend for that order to stay open before it gets filled or it expires. Time in force orders allow you to place time limits on how long each order you place stays active.

Using time in force orders can make controlling trades easier, specifically if you’re an active trader. Placing time limits for trades can prevent you from having them completed above a specific cutoff. That is a bonus as you wouldn’t be required to go in and terminate existing orders one after the other. You also wouldn’t have to fret over trades getting executed mistakenly.

This is able to guard against likely losses if you’re trading during the time of increased market volatility. While you can’t control wide price swings in stock prices, you can control whether trades linked with those stocks are completed or not using time in force orders.

Regardless of which time in force orders you decide to implement, the aims for each one of them are closely related. They enable you to observe the markets, as opposed to needing you to focus on your trading session. By placing certain end dates for trades, you need not to get concerned about trades extending outside of the particular set time frames. This can be very useful if you’re actively trading and monitoring the movements for a wide variety of securities each day.

Russell Crane

Russell Crane

Russell is an Algorithmic & Technical Analyst Trader @ PatternsWizard.
His passion is to share his knowledge about TA, patterns & more. Why hope for your trading to work when you can precisely know the performance stat of every pattern?

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