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A leg is used to describe a component of an option trade where that option trade requires more than one setup. An example of an option trade with legs is a straddle. A straddle has two trade components or legs, one above and the second below the market price.
TimRacette posted a topic in TradingMost traders experience a significant amount of slippage on their positions. Most traders also fail. There are two things you must know to get better fills, less slippage and fewer stop outs. The first thing which leads to better fills is knowing when to use the different order types. When entering a position you have the ability to place a market order or a limit order. Which is best. Market Orders These orders are great for exits, but dangerous for entries. This is because a market order is an order to buy or sell at the market, whatever that current price may be. We all know that the markets move incredibly fast so when you place a market order or click the join bid/ask you are essentially throwing your hands up in the air saying “I don’t care where I get filled.” Is there a better option? Limit Orders Yes. The way to get better fills is to use an order time foreign to most traders, limit orders. This order type ensures that you will get the best fill possible because a limit order is instruction to buy or sell at the price you select OR BETTER. This means you cannot get filled for anything worse than where you place your order. When to NOT Use Limit Orders There is one instance that you would not want to use a limit order, when placing stops. A stop order is saying, “When price touches this level I want to close out my position at the market.” For most order execution platforms a stop order is by default a market order. If you were to use a stop limit order and price were to quickly move through your stop price, you would remain stuck in the position. Think about it. That limit order is saying, “I want to get out at this price or better” so if you’re long with a stop below you and the market quickly moves through your stop limit order, the order will stay active and not fill you, very dangerous. Tips for Breakout Traders If you are the type of trader who likes trading breakouts, instead of waiting for price to breakout and then clicking the market button consider using buy stops and sell stops. Placing a stop just above the break out point where you would like to enter will push your order into the market at the point that the market breaks your level. While this order is a market order, placing it well in advance will help reduce slippage because most platforms use a FIFO, (first in, first out) method. Meaning if you want to buy above highs and place your order sooner than the next trader, you will be filled first. If you wait for that breakout and then hit the market button you will be last in line. Example Trades Tips for Traders Using Retracements This is where the power of limit orders really shines. If you’re the type of trader who likes to buy or sell when price has retraced of its highs or lows, using a limit order will ensure that you will get filled at your price or better. Waiting for price to retrace can help reduce the number of stop outs you take. The reason being, you are not impulsively jumping in at highs, you are waiting for that pullback in the larger trend and as that counter trend trade loses steam, you enter in anticipation that the market will resume in the current direction. The Downside of Limit Orders One con about using limit orders is that if price does not go beyond your order you will not be filled. This however, can be looked at as a good or bad thing. Limit orders ensure you get the best possible price, and I’d rather trade in this way missing a few trades, than taking stop out after stop out, by impulsively clicking the market order.