- 2 years ago
This week, Aaron and Ryan talk about trade execution best practices. From how basic order types work, to when to use them (and when not to), to how professional traders enter and exit positions, to the more exotic order types and how they work, this episode covers everything you need to know to become a more skilled executing trader!
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NewsTranscript
00:00 (upbeat music)
00:02 Let me go ahead and bring my man Ryan on.
00:08 Ryan, how are we doing today?
00:10 - Good, Aaron, how are you doing?
00:12 Good weekend?
00:13 - Yeah, man.
00:14 - Monday, Saint Troy rally.
00:17 - Yeah, I mean, it's been a big rally,
00:19 as I'm sure I don't need to tell you.
00:21 And now, you know what's funny, Ryan,
00:23 is everyone, you know, people just change their perceptions
00:27 with the market so fast, right?
00:29 Now that the market's hot,
00:30 everyone is adjusting their price targets for next year.
00:33 Everyone's saying, "Oh yeah, we've been bullish
00:34 "for the last six months," all that stuff.
00:36 And it's like, well, I don't know.
00:37 The data shows that a lot of people were bearish,
00:41 you know, six months ago, and now are turning bullish.
00:45 But often that happens is that price will predate sentiment
00:49 and sentiment will kind of just follow
00:51 whatever the price is doing.
00:53 - Absolutely, I mean, you've seen it before, right?
00:56 I mean, market outlook is the predominant sentiment,
00:58 whether that sentiment makes sense or not.
01:00 You see, we get into COVID, market goes off a cliff,
01:05 hangs out there for like five minutes,
01:08 and globally, everyone sort of says,
01:10 "Yeah, I know that everything's shut down,
01:12 "supply chains have been destroyed,
01:13 "but I think I'm gonna bid this up."
01:15 And up it goes, much to everyone's shock.
01:19 But it doesn't matter, right?
01:20 I mean, we're talking about stock speculation.
01:23 You know, if anybody thinks that Tesla's current
01:27 fair market value is an accurate representation
01:30 of the breakup value of that company,
01:32 you're dreaming.
01:34 You know, that could be applied to 99% of the S&P 500.
01:38 It doesn't matter, that's the price that it trades at.
01:40 That's what people are willing to make a market around,
01:42 that's the reality, so.
01:44 - 100%, well, again, you know,
01:47 we've been doing this educational series every Tuesday.
01:50 You know, we're getting into order types today,
01:54 which I'm very excited about because,
01:57 you know, it's something that
01:58 I never really think about, Ryan.
02:00 I just kind of go out there and I make my orders,
02:03 I buy my stocks, but, you know,
02:05 we've discussed at this point our strategy,
02:08 we've got our strategy, we're ready to go.
02:10 We've identified an entry point
02:13 and we're ready to make an order.
02:15 What are the basics?
02:17 What is a limit order?
02:18 What's a market order?
02:20 And when should they be used?
02:21 Is there a time for one or the either?
02:23 Or should you always stick to one?
02:25 - Yeah, that's a great way to start.
02:28 When should you use them?
02:29 Like, never.
02:29 Those are two tremendously awful order types
02:33 for entering a position.
02:35 They have a use, we'll talk about that.
02:37 It's appropriate that we're doing order types today.
02:40 We sort of dealt with risk management.
02:43 We first focused on, you know, how to stay out of trouble.
02:45 Now we're gonna teach you how to get into trouble.
02:47 So here we are, right?
02:48 You know, you've got your risk mitigation is now on point
02:51 and you're ready to fire your orders.
02:53 How can you do that in a more responsible way?
02:55 Okay, so market order,
02:57 I'm sure most of your viewers know what this is.
02:59 Market order, any order type, let's just pause for a second.
03:03 Any order type is a small series of instructions
03:07 and permissions bundled under a single term, right?
03:10 That's essentially what it is.
03:12 It gives your broker permission to do something.
03:16 So market order says, I wanna buy or short this stock
03:21 for any price, so long as it's in between the MBBO, right?
03:26 The National Best Bid Offer, right?
03:28 The bid ask spread, another term for it.
03:31 So as long as it's in between there, it's fillable.
03:35 Why is that a terrible order?
03:36 Well, there's two reasons.
03:37 One, you're in the position immediately
03:41 without forcing the stock to move in the direction
03:43 you think it'll move in.
03:45 We'll talk about that in a little bit.
03:47 But really by giving permission to the broker
03:50 to fill you anywhere in the spread,
03:51 if that spread is moving quickly
03:54 and the broker feels like filling you
03:56 out of their inventory, all brokers hold inventory
03:59 and they have the right to fill you
04:00 out of their inventory,
04:02 your order might not ever show up on the floor.
04:04 You throw a market order out there, they're like,
04:06 hey, sweet, I wanted to get rid of this stock anyway
04:09 and you are literally willing to pay anything for it
04:11 so long as it's in between these two fast moving points,
04:14 let's sell you that to my advantage.
04:16 So we don't use that for position entry.
04:20 A limit order is basically the same order
04:23 only you have a cap on it.
04:25 It's anywhere within the MBBO up to this point.
04:30 So if you've given the broker permission to do that
04:34 and the spread is fast moving,
04:35 I'm sure a lot of your viewers here
04:37 trade fast moving equities.
04:40 So if that's the case, where's the incentive
04:44 or best price execution for you?
04:46 It's like, well, you're willing to pay,
04:48 stocks 11 bucks you're in and you're willing to pay 1138.
04:53 If where's the incentive in a fast moving spread
04:57 or ripping stock and not fill you with the limit,
04:59 you gave them permission to do so,
05:01 why would they not do that?
05:03 We do use limit orders for options trading
05:05 and we do use market orders for stop losses,
05:07 but never, never, never, never for entry,
05:10 not ever for those reasons.
05:12 You're just gonna get terrible executions
05:15 and no capacity to guard against a whipsaw.
05:19 So there's my hate on markets.
05:23 - So what about, and I just, I'm curious now
05:25 because we have a lot of our audience,
05:29 day trades as kind of a hobby and they, like you said,
05:33 they're trading kind of these quick things,
05:34 but some of them might also have separate
05:36 investment accounts and portfolios.
05:39 I mean, if you were just gonna buy a stock
05:40 that you wanted to hold for five years,
05:42 would you still avoid a market or limit order?
05:46 - 100%.
05:47 You have given away control of your execution price
05:52 to somebody else who has complete legal permission
05:57 to execute to their benefit
06:00 within a very loose set of rules.
06:02 Now, even worse, let's say you're an odd lot trader.
06:05 You trade fractional shares.
06:07 You're not trading round lots of 100, right?
06:09 You're odd lot.
06:10 You're not protected by the MBBO in the first place.
06:13 You can sit off to the side while the spread moves around.
06:17 They compile a series of odd lot orders together
06:20 so they can make a whole order.
06:22 By then they're gonna execute that way far away
06:25 from where it was when you entered.
06:27 So you never wanna do that.
06:28 You wanna control your entry price.
06:30 And you do that by using, if you're going long on a stock,
06:34 you use a buy stop limit order.
06:36 That is what we all do.
06:38 And if you're selling it, it's a sell stop limit order.
06:40 What the hell is that?
06:41 Okay, so let's just pick a random example.
06:45 You're gonna buy stock XYZ, it's $10.
06:49 I'm gonna set a buy stop at, let's say $10 and 18 cents.
06:54 And that means that I'm gonna force the stock
06:57 to move into my buy stop to trigger it.
07:00 That's gonna save me from a whipsaw.
07:01 If I market buy that and it ticks up to 10.04,
07:06 rolls over and dies, well, crap.
07:08 Now I'm in the position and I gotta manage,
07:11 maybe I'm gonna hit my stop loss
07:13 because I caught not the beginning of a meaningful surge,
07:17 but the tail end of a lame run.
07:19 Now, if I set it for $10 and 18 cents,
07:23 it has to move substantially with some energy
07:26 into my buy stop.
07:27 Okay, so now it triggers,
07:29 but I don't wanna pay any price for it.
07:31 I wanna control the price.
07:33 So I use a limit on top of that, buy stop limit order.
07:36 So the buy stop triggers at 10.18, call it 10.30.
07:41 That's it, that's the most that I'm willing to pay.
07:44 So I have guaranteed that I'm only gonna be filled
07:47 between 10.18 and 10.30.
07:49 If the stock just blasts and rips right through that,
07:53 you don't want it at any price, right?
07:55 I mean, you're not willing to pay anything for it.
07:57 You have a specific idea of what you wanna pay.
07:59 Anywhere in here looks good.
08:00 Okay, fine, so dictate that.
08:03 Has to move into my buy stop, trigger the order,
08:06 no further than here, that gets me filled.
08:08 Same thing short.
08:10 I force the stock to collapse into my sell stop,
08:14 but I set a limit.
08:15 So if it just craters, if it is just hurtling downwards,
08:18 I don't want my average fill price to be way, way,
08:22 way below where I analyze this thing,
08:25 'cause I'm gonna end up having to cover super fast,
08:27 again, if it whipsaws.
08:29 So that is called bracket order in the professional space
08:33 or buy stop limit order, sell stop limit order.
08:36 Same thing for position trading, Aaron.
08:38 Your question, if I wanna buy this thing
08:40 and hold it for 10 years, why wouldn't you control price?
08:43 Right, you set this corridor and you're like, yeah,
08:46 whenever you get there, you could do good till cancel.
08:49 If you were like a position trader,
08:51 you set this corridor up, which is what institutions do.
08:53 And it's like, if that falls into that corridor,
08:57 I'll take this much of it.
08:58 No more, no less.
09:00 It'll fire and stop right there.
09:02 So that's how we get into positions
09:05 generally in equity trading.
09:08 - Yeah, and the reason I ask is 'cause literally
09:10 just this morning, I went into my Roth.
09:12 I still had some end of year contributions
09:16 to make to catch up.
09:18 And I was buying a stock and I was like, well,
09:22 and it was already up 8% or 9% this morning.
09:25 I was like, maybe I don't wanna buy it up here,
09:26 but I was like, you know what?
09:27 It doesn't matter.
09:28 I'm gonna own this stock for a while anyway.
09:30 I'm not buying to trade it.
09:31 And so I just bought it with a market order
09:34 at whatever it was.
09:35 And I was like, and then right as I was doing it,
09:38 I thought about you, Ryan.
09:39 I was like, I bet you Ryan's gonna tell me
09:40 that this is not what I should be doing right now.
09:42 - I was gonna tell you it was a terrible idea.
09:44 - Well, I'm glad I went out and got,
09:48 you know, did it ahead of time at least.
09:50 So now I can at least say, well, I know better now
09:53 and look back on it and realize, you know, what I did wrong.
09:56 So next time I know, you know,
09:59 how I can set myself up for success better.
10:03 - I mean, like, again, if you're planning on holding this,
10:07 then, and it's up 9% or 10%,
10:10 and you set a buy stop limit order above the current price,
10:14 and it never makes it, and it tanks,
10:17 and it goes down 9%, 10%, 15%,
10:20 and it bottoms and it recovers.
10:23 And in two months, it's back up
10:24 to where you would have bought it.
10:26 Using the buy stop limit order saves you
10:29 from holding this thing that whole time.
10:32 So it continues to move up, it triggers.
10:35 I mean, with something that's up 9% or 10%,
10:37 you wanna do an average run gain analysis
10:39 against previous runs.
10:41 How far does this thing run when it runs?
10:43 If the average run gain is 9% or 10%, it's about done.
10:48 You kind of missed it, right?
10:49 But if the average run is like 20%, you're halfway there.
10:52 Okay, set your buy stop limit order above,
10:55 let it enter that price bracket, execute, you're good to go.
10:59 If it doesn't make it, you move on,
11:01 put your cash somewhere else, set an alert,
11:04 or you can just leave that bracket.
11:06 If it ever comes back there, you'll take it, right?
11:08 'Cause you want it in the first place.
11:10 - Right, so let's say we've made our order now,
11:13 we've set up the stock, went up and hit our price
11:15 that we needed to trigger that buy, we have it.
11:19 Now we'll talk about order types
11:20 when you already own the stock.
11:21 What's a stop loss?
11:24 And when should someone use this?
11:25 - That's the first thing, good, I love it.
11:27 Like continuing on from our last question,
11:29 that is the first thing you do.
11:31 So you don't set all of your orders together, right?
11:34 Because if I set my buy stop limit order
11:37 and I set my stop loss and the stock does not hit
11:42 my buy stop limit order and the stock craters
11:46 and hits the stop loss, I don't hold the stock.
11:49 So that stop loss will turn into a short order
11:52 if I don't already hold the stock.
11:55 - Oh, okay.
11:56 - So you don't wanna add the stop loss
11:57 until you're in the position, right?
11:59 So you don't line it all up together,
12:02 you buy stop limit, you'll get an alert on your phone
12:05 or you're watching your trade system or whatever it is,
12:09 right, you're in the position, then you're gonna go,
12:11 you've done your risk analysis that we discussed last week
12:15 and you're gonna put your stop loss in.
12:17 And remember all stop losses are good till cancel.
12:20 You do not put GDO or good day only for stop losses
12:25 because you'd have to reset them
12:27 and that's not a true acceptance of the risk.
12:29 Remember we're using the stop loss as a,
12:32 if it gets here, I'm wrong,
12:34 I'm cool with losing this much money, I am out,
12:37 close me out.
12:39 And it's a market order, not a limit order
12:41 because it's not close me out,
12:43 but if it gets worse than this, what are you gonna do?
12:45 Not fill, you're gonna hold it as it goes further down.
12:48 You just want out at all costs at that point.
12:51 So stop loss is just a stop market order.
12:55 Stock collapses, boom, you are gone.
12:58 That's the next thing that you are going to do.
13:00 Now, in terms of once you're in the position,
13:03 the other side of that, let's be optimistic.
13:06 Okay, if you're not gonna monitor your trades
13:09 and you wanna just leave a profit taker on,
13:12 you can do that, right?
13:13 Which is yet another sell order, right?
13:17 But now I'm gonna set it way above my bracket.
13:20 If it gets up here, I'm good, I'm gonna take my profit.
13:23 I don't know a lot of traders that do that.
13:25 I doubt your viewers do that because,
13:28 when you're at the, maybe that's a middle of a powerful run,
13:33 maybe it's near the end of a run.
13:34 You wanna do a run gain analysis
13:36 before you take your profit.
13:37 Like you don't wanna just, hey, you're closed out,
13:39 congratulations, you made 22%.
13:42 It could have been 50, but you're out at 22, bit lazy.
13:45 - So we talked about last week how to make more
13:48 on your winners than you do lose on your losers.
13:50 So it seems like limiting your cap
13:52 on what you could make on your winners
13:54 would be like a bad way to go about it.
13:57 - Exactly, what you can do, which we generally do,
14:01 is we set a profit alert, right?
14:03 So there's an alarm that goes off
14:06 when it gets to a point that says, okay, around here,
14:10 you should start looking at exiting.
14:13 And you can, now you're gonna pull up
14:15 your intraday minute chart.
14:18 Is it struggling?
14:19 Is it near its peak?
14:21 Do you have some sharp retracements?
14:24 Are the quantity sizes for the sell orders large
14:29 relative to the buy orders?
14:30 That's important because if you see that,
14:33 if there's heavy volume each time it ticks down
14:35 and light volume market orders on the way up,
14:38 that's retail traders trying to catch the tail end,
14:41 it's FOMO traders.
14:42 You don't wanna be in that group.
14:44 The big lots exiting or profit taking by institutions,
14:48 that's when you wanna go.
14:49 So you're gonna look at your intraday charts.
14:52 If you don't wanna sit around and manage this,
14:55 you can use a dynamic trailing stop.
14:57 Almost all software will have a TRL or trail,
15:01 which you can add.
15:03 And there's, so again, you'll set a stop
15:07 and you could set it like right above current price
15:09 if you want it to start trailing right away.
15:11 And then you set the amount of the trail.
15:13 Usually you can use a dollar amount or a percentage amount.
15:17 So stocks trading up, I set a trail stop
15:21 and stock triggers my trail stop.
15:24 And let's say I have 1% or half a percent as my trail.
15:29 That means that the trailing stop will keep going up
15:33 as the stock goes up.
15:35 The hard stop is half a percent below that.
15:39 So if the stock retraces, my trail doesn't move anymore
15:43 and it's got this half a percent exit below.
15:46 So if the stock price goes down,
15:48 oh, but it doesn't touch it and it makes another surge up,
15:52 the trail will move up again, move up, move up.
15:55 And when it stops doing that and it collapses,
15:57 once it goes through that floor, you'll mark it exit.
16:00 So that's a good way to try to eke out every last dime
16:04 without sitting there and watching intraday ticks
16:09 go on and on and on and second guess.
16:11 You could just sit that there.
16:13 If you're going to use that,
16:16 only additional piece of advice is it's important
16:21 to look at the intraday movement, use the minute.
16:24 And if you wanna see clumps, use the three minute timeframe,
16:28 but use the minute and see what the pullbacks
16:31 generally look like.
16:32 If your trail exit is too tight,
16:36 you might as well just close the position.
16:37 It'll trail up and you'll be out, I don't know,
16:40 30 seconds later.
16:41 So see where it looks like, if it goes below,
16:46 it's probably gonna roll over and make sure
16:48 that that's the space again, dollars and cents
16:51 or percent where you set that trail.
16:54 So that's another thing that you're gonna use.
16:56 - Got it.
16:57 And so we've talked about market orders, limit orders
17:01 and why to avoid those.
17:02 We've talked about that kind of bracket order setup,
17:05 trailing stop.
17:06 Are there any other order types
17:08 and what situations would you use them in?
17:11 - Sure.
17:12 If you have access to a more advanced broker,
17:16 say what we would call like a semi pro broker,
17:19 interactive brokers, something like that,
17:22 you're gonna see on your order ticket entry widget,
17:26 you're gonna see a series of different types of orders
17:29 and you're gonna see routes that you can choose.
17:33 Route is probably set to auto
17:35 and you are fine leaving it there.
17:38 The order types are going to be market, limit.
17:43 You can do the buy stop limit.
17:45 Some will say BSLO right there.
17:48 So that's gonna ask you for the stop and the limit.
17:51 You'll have trail that might be great out
17:54 if you're not in a position because what's it trailing
17:57 depending on the broker.
17:59 Some of them you can actually trail your entry.
18:02 I'm gonna trail it up
18:03 and then I'm gonna short it after it collapses.
18:05 But I wouldn't recommend that use the bracket order
18:08 because again, you've got a market order with the stop.
18:10 And then you're gonna have these exotics, right?
18:12 You're going to see things like iceberg or stealth
18:17 or sweep to peg or something like that.
18:21 SMGD, those are specific pro trader
18:26 and institutional order types
18:27 that are not going to be meaningful for you.
18:30 So iceberg order, for example, is for larger sizes
18:35 and you only wanna show part of the size to the market.
18:38 So again, the concept of the iceberg, right?
18:40 You're only seeing the tip of the iceberg.
18:42 So I'm gonna sell, I wanna buy or sell 10,000 shares of ABC
18:47 but I only wanna show a thousand or 1500 to the market.
18:52 So I'll choose iceberg, I'll choose 1500 as my show size
18:57 and I'll see what, I mean, it's called a feeler order.
19:00 I'll see what the uptake looks like at 1500 orders
19:04 and the rest of my orders stack behind that.
19:07 So when the 1500 trigger, if there's more size there
19:10 it'll just suck up the rest of my order
19:12 without me loading up a 10,000 lot order
19:17 that people can see on level two.
19:19 So that's when you'd use that.
19:20 But if you're trading 500 shares, a thousand shares
19:23 couple of hundred shares,
19:25 there's no use iceberging like a hundred shares.
19:28 That's not helpful.
19:29 So you don't, you need to use that.
19:31 Sweep and peg is for fast moving markets
19:33 trying to find best price execution, again, large size
19:37 and the spread is rapidly moving.
19:40 So instead of just getting filled in there
19:42 instead of constantly trying to hit a moving target
19:44 you have these algos that will sweep the spread
19:47 and try to fill at a specific peg, like a mid, mid to bid
19:52 mid to offer something like that.
19:54 Stealth is like a fake dark pool order.
19:58 You don't have any access to unlit trade venues
20:01 as a retail trader.
20:03 So I think that one, I saw one broker called it ninja
20:07 and I just couldn't believe it.
20:08 But that's something where it's claiming
20:12 that it's hiding your whole order size
20:14 and sending it to an ATS, alternative trade system.
20:18 And it's really not doing that.
20:20 I find that a bit, that's pushing the line of decency.
20:24 So those, you don't have to worry.
20:25 The routes, the routes you actually can use.
20:29 It'll be set to auto.
20:31 If you are watching the depth of book,
20:34 if you are watching on which exchange
20:37 most of the trades are being executed favorably
20:41 we call that the ax, right?
20:43 Which of the exchanges is the ax for that stock?
20:47 It's Amex, it's SIBO, it's BATS, it's FILEX, it's whatever.
20:54 If you see that showing up,
20:55 if you have that type of data feed
20:58 and that's where most of the executions are going
21:00 then you might consider routing there
21:02 bearing in mind the different exchanges
21:04 and routes have fees associated with them.
21:06 ARCA for example, is very, very fast and high liquidity
21:10 but it's a little more expensive to route to ARCA
21:13 than somewhere else.
21:14 So that's the routing part and why you might choose that.
21:17 Generally, you are fine with your buy stop limit,
21:21 your sell stop limit and an auto route.
21:24 99.9% of the time.
21:25 - Got it.
21:27 So if someone did wanna use some of these more exotic
21:30 trade types to kind of try and maximize their profits,
21:36 what would you, I mean, for just an everyday person,
21:39 like which ones would you recommend
21:40 and how would they kind of utilize those
21:43 to maximize their profits?
21:44 - So the first thing I do is contact the broker
21:48 and if it's not in the help files,
21:51 like interactive brokers, I know for a fact
21:54 you can go to the help files, you can look at order types
21:57 and there is a description
21:59 of each of those specialty order types.
22:02 If you do not understand what it means, cut that out,
22:07 open a support ticket, paste it in, say,
22:09 "I don't know what the heck this is telling me to do
22:11 or what this is supposed to achieve,
22:14 please explain it to me."
22:15 It's their job to do that.
22:16 So they can give you a more lay person's description
22:19 of what that will do.
22:21 And then you can decide whether or not that's meaningful.
22:24 Personally, at your average retail investor,
22:28 average retail trader level,
22:29 I don't think many of those are going to be useful.
22:33 Maybe sweep and peg or post to last,
22:37 if you are trading something
22:38 with an enormous amount of liquidity
22:41 in a spread that's moving very, very quickly.
22:44 There's not a good way to capture mid, mid, mid, mid, mid
22:48 if you want to average to mid
22:51 without using that type of an order.
22:54 Again, I would highly recommend the buy stop limit
22:57 and just let it fill in your bracket
23:00 because you're okay with that price range, right?
23:02 You want it here, you're okay with up to there.
23:05 So anywhere in there is good.
23:07 You don't need the exotic order type.
23:09 What I would say is more useful,
23:12 if you want to accumulate reasonable size
23:16 in something with low liquidity,
23:17 because I know some of your viewers
23:19 trade lower liquidity stocks,
23:23 maybe slightly lower price stocks, so-called penny stocks.
23:28 If a low float, low liquidity penny stocks,
23:31 if you're looking at the minute timeframe,
23:34 the three minute, and you're just seeing dashes,
23:36 like there are minutes or three minutes with no prints,
23:40 then you want to control your order a little better.
23:42 And what you can do with that
23:44 is see if your broker offers
23:47 an accumulation distribution algorithm,
23:50 ActDist, we call it.
23:51 Interactive Brokers does for sure.
23:53 And I don't mean to keep hyping Interactive Brokers,
23:55 I just know that they have the tools.
23:57 Other brokers that use may totally have them.
23:59 And so what that does is let you set that bracket,
24:03 but you can set price and time offsets.
24:06 So instead of trying to get it all at once,
24:09 because it's low liquidity,
24:11 you're gonna blow through the spread quickly,
24:13 you get a partial fill,
24:14 you'll be on the other side of your limit,
24:16 and then not able to fully fill,
24:17 and you've got to go back and try again,
24:19 or wait for price to settle.
24:21 You can have this thing buy 100 shares at a time,
24:25 every 10 minutes, and set it to go for two hours,
24:29 or whatever you want to accumulate.
24:30 So it's just gonna buy 100 shares at this price,
24:33 again, buy stop limit here, and then shut off.
24:37 And it'll wait.
24:38 And when it comes back, eight minutes later,
24:41 six minutes later, 10 minutes later,
24:42 whatever your offset is,
24:44 if it's between your two points,
24:45 it's gonna buy another share, another 100 shares.
24:48 And what you'll see is the spread will spike
24:51 after you've been filled, it'll sit there,
24:53 and it'll settle, and then you'll get filled again.
24:55 So that to my mind is more useful in a retail application
25:00 than an Iceberg or SMGD order or something like that.
25:04 - 100%.
25:08 And one thing I'm curious about, Ryan,
25:10 is do markets treat different order types
25:13 or different size orders differently,
25:15 or do they treat everything the same?
25:18 And what should traders know about this,
25:21 and how maybe the market is treating their order types
25:25 differently than other traders out there?
25:27 - Right, that's actually a really good question, Aaron.
25:31 And I think not a lot of traders know this at the beginning.
25:36 So we'll start with the NBBO, which we talked about before,
25:41 the National Best Bid Offer.
25:43 And that's just the bid-ask spread.
25:45 You see it, anything that's trading,
25:47 anything that's quoting, we'll have a bid and the ask,
25:49 in between the two, there's your spread.
25:51 And the law says that if you enter an order
25:56 that's marketable, you must be filled by your broker,
25:59 by the market maker, in between the NBBO, right?
26:03 Now the spread can be moving,
26:04 and if it moves fast before you're filled,
26:08 they're not obligate to fill you where the spread was
26:11 when you put your order in,
26:13 hence using these bracket orders, et cetera,
26:15 as the spread is moving.
26:17 But if you enter an order,
26:19 you can't be filled below or above the NBBO.
26:23 And price, time, and quantity matter.
26:25 You send your order in,
26:27 whoever gets there first is getting filled first.
26:30 If the spread is there and you have a marketable order,
26:32 you're guaranteed to fill there.
26:34 If you do not have round lot orders,
26:37 you're buying 38 shares, seven shares, 15 shares, 83 shares,
26:42 you're considered an odd lot,
26:45 and legally you do not get the protections of the NBBO.
26:49 What happens is your little order sits off to the side
26:52 and a bunch of other odd lots come in,
26:55 and then the broker makes up a whole lot off of that,
26:59 and then sends it out.
27:00 So bear in mind that if you're not trading whole lots,
27:04 100 shares or higher,
27:05 you are not afforded the NBBO protection.
27:08 So it's a little dangerous.
27:09 Also pre-market and aftermarket is not for you.
27:14 That's gonna sound crappy and elitist.
27:17 It's not an extended hours trading opportunity.
27:22 It's a counterparty inventory control time, right?
27:27 Like we're calling counterparties
27:29 and we're shifting shorter long stock
27:32 that got assigned after an expiration Friday.
27:35 No protections exist pre and post-market.
27:38 NBBO out the window.
27:39 This is like a direct person to person conversation
27:43 and kind of anything goes.
27:45 So I know everybody wants to get access
27:48 to pre and post-market because they think
27:51 it's like this kind of secret club.
27:52 It's like, well, hey, maybe I can trade a little bit
27:54 before the market even opens.
27:56 Very dangerous because you are outside
27:59 of the SEC protections.
28:01 You're basically taking your fills,
28:04 your deal into your own hands.
28:06 I would not recommend that unless you're trying
28:09 to shift assignment that happened to you post-close
28:14 or at close previous trading day
28:16 on like an expiration Friday or something.
28:18 And even then you'd wanna do that with some guidance.
28:21 So you don't wanna do that.
28:23 And then finally, what I'd say is in terms of the size,
28:32 most retail traders and investors
28:33 have this huge advantage.
28:36 I mean, the media, other professionals
28:39 tend to treat retail investors and traders,
28:42 ah, you guys are so small, you have these little orders.
28:45 Are you kidding?
28:46 The agility that's available to the retail sector
28:49 is unbelievable.
28:51 Like you are in a position probably penny accurate
28:56 whenever you feel like it.
28:57 Like for the rest of us, it takes forever to get in
29:01 and out of positions.
29:02 Like if I'm trying to sell out of 750 spreads of Disney
29:07 under pressure, it's going to take,
29:11 like I'm gonna be on the phone with a counterparty
29:15 as I'm offloading these short spreads under pressure,
29:19 I'm literally causing the counterparty or the market maker
29:23 to buy the stock that's hurting me to offset their own risk.
29:29 Essentially my offload is causing me greater pain.
29:33 That will never happen to you.
29:34 You'll be offloading like eight spreads, six spreads, boom.
29:38 At the mid, mid to offer, you are done,
29:40 clear and on with your day.
29:42 So in terms of being treated fairly or unfairly
29:45 by the market, I would argue that small lot traders,
29:49 not odd lot, but small lot traders
29:50 have a huge execution advantage.
29:53 You should absolutely take advantage of that.
29:55 - Yeah, that's a great advice because Ryan,
29:58 I was in that camp definitely that thought,
30:01 oh my God, my broker is offering more and more
30:04 extended hours trading.
30:05 This is great.
30:05 I have more access, but really,
30:07 maybe it's not the best time for me to be trading
30:11 in those times.
30:12 As you said, there's not as many protections.
30:14 It might not be as clear as what's going on
30:17 as that during the regular market.
30:19 How does AI factor in here?
30:21 I mean, when it comes to order types and all this stuff,
30:24 what should traders be on the lookout for?
30:27 - Okay, so we've talked a little bit before
30:29 about AI in flow predation.
30:32 So the manipulation of flows, again,
30:35 this really only happens because of the overuse
30:39 of market orders.
30:41 If everybody used buy stop limit orders,
30:44 you're stopping flow predation algorithms
30:47 from shoving the spread far enough
30:50 to disadvantage you extraordinarily, right?
30:53 Because you have a contract
30:56 when you've submitted your buy stop limit order
30:58 that says, uh-uh, between here and here, that's it.
31:02 All of a sudden the spread surges
31:04 and your order's gonna shut off.
31:06 You know, partial fill, no fill, whatever it is,
31:09 you're fine with that.
31:10 Come back to me and we'll trade again.
31:12 Let's see if we can't make a deal, but not at any price.
31:17 So by using market and limit orders,
31:19 you're making it easier for these systems
31:22 to treat you as like feeder fish.
31:25 And certainly when it comes to like signal crossovers,
31:30 we've talked way back in the indicator,
31:33 please don't use MACD because flow predation systems
31:37 will try to move markets based off of a MACD crossover.
31:42 They know you're going to red light, green light trade on.
31:45 So when there's a crossover,
31:47 you get these algorithms that will kick in,
31:50 try to, because they have enormous volume to use to do so,
31:54 it's completely legal using the MBBO,
31:57 combination of buy and selling, move that spread,
32:01 kick your market order, and then you'll get whipsawed
32:03 because once they've exited,
32:05 what do they need you anymore for?
32:07 Thanks for the extra liquidity, we're done,
32:09 stock collapses, you don't get the follow through.
32:11 Sometimes you will, sometimes you won't,
32:13 which is why MACD persists in a retail traders toolkit
32:16 because you've probably had some good experiences with it
32:19 and then you've had some terrible experiences with it.
32:22 So be aware of that.
32:24 My fear, I haven't seen this yet, honestly,
32:28 and like we ingest the entire stock market
32:32 at the tick level every day,
32:34 and examine 220 terabytes of tick level data,
32:39 we see every print of every stock anywhere
32:42 in the United States.
32:44 So when you're looking at that,
32:46 thankfully I haven't seen this yet, but it will show up,
32:49 these AI systems are going to try to mimic retail sentiment.
32:53 And you watch this, right?
32:54 I mean, I'm presuming that most of your viewers
32:57 are watching the prints for whatever you're trading,
33:02 you're watching the order flow for sure.
33:05 And you can see 100, 100, 100, 100, 100, 100 constantly.
33:10 Maybe some odd lots flow through,
33:13 a little bit of size here and there,
33:15 that's gonna look like retail sentiment to you.
33:18 Or it's a sliced order, right?
33:20 It's an accumulation order that slicing a larger order
33:24 and sending it out bit by bit by bit.
33:27 And so if you're seeing this positive printing up
33:30 at the offer over and over and over again,
33:32 the spreads moving up, you're excited,
33:35 you only wanted to buy 200 shares,
33:37 but man, this thing is kicking.
33:39 And everyone's, no one's getting filled at the bid,
33:42 everybody's getting filled at the top of the spread,
33:44 spreads moving up, you know,
33:46 maybe I'll take another 500 here.
33:48 That's the goal, right?
33:51 Bid up, bid up, bid up, buy it,
33:53 and then you're into their flow predation.
33:56 So I wouldn't say necessarily like look out for that,
34:00 but it's weird if you're watching order flow
34:04 and all of these hundred lot orders
34:06 are printing near the offer.
34:08 That's something that you sort of stop
34:12 and step back and consider.
34:14 Also, bad algorithmic distribution or slicing,
34:19 you may be watching order flow
34:20 and you see like a bunch of weird orders,
34:22 you know, 1,348, 1,348, 1,003,
34:27 like you'll see this repeat, repeat, repeat, repeat, repeat.
34:30 And then you'll see like one closing order, 238,
34:34 something like that.
34:36 That's the world's laziest accumulation algorithm
34:39 trying to slice up 20,000 shares.
34:41 It's randomized it into these idiotic random slices,
34:46 gets almost to the end,
34:47 and then it fills it with this one last lazy fill.
34:50 So if you see that,
34:51 you know that you're looking at algorithmic accumulation.
34:54 There's not a person doing that.
34:55 No person does that.
34:56 - Those are, I mean, those are just a lot of things, Ryan,
35:00 that's great information to have
35:02 that I never even really would have thought about
35:04 like in my own trading journey.
35:05 So I'm glad we got to touch on it today.
35:07 I mean, we've talked about basically
35:10 every single different type of order type out there.
35:13 If you guys again ever need to, you know, refresh, go back,
35:17 you can always go back on the YouTube video
35:20 and rewatch some of the sections.
35:21 But Ryan, let's get into our Kaiju kicker.
35:24 Gonna go ahead and pull up
35:26 and we'll hit all the big points we hit on this week.
35:28 Little recap of the lesson today.
35:32 Walk me through it.
35:33 - All right, I gotta lean up here
35:36 because I can't see this tiny little screen.
35:38 You want me to read it? I can read it for you.
35:40 - You read it, you read it.
35:42 - All right.
35:44 For equities trading,
35:45 always use a BSLO, buy, stop, limit order.
35:50 Never use a limit or market order
35:54 for entering an equity position.
35:57 And that's important, you know, that number,
36:00 that second one up there, guys, that second bullet,
36:02 never use a limit or market order
36:03 for entering an equity position.
36:05 Keep that in mind 'cause I think most brokerages
36:07 will offer you one of those two options as the default.
36:11 So unless you go out of the way to change it,
36:12 chances are you're using one of those right now.
36:15 Never use a limit order for exiting an equity position.
36:19 So that's what we talked about.
36:20 You don't wanna kinda limit your gains ever.
36:23 You wanna limit your losses.
36:24 We talked about this last week, limit your losses,
36:26 but you don't wanna limit your gains.
36:28 When you enter a new position,
36:30 always enter a stop loss set to good to canceled.
36:35 If you don't, you're not actually accepting the risk
36:38 of the trade on entry.
36:40 And then finally, do not use exotic order types or routes
36:44 unless you actually know what you're doing.
36:46 So yeah, Ryan, any comments, any final thoughts?
36:51 - I think that that sums it up.
36:53 You'll find, I think if you start using
36:56 the buy, stop, limit order, you will,
36:59 the first thing you're gonna notice
37:01 is you will 90% of the time avoid getting whipsawed.
37:05 You've probably experienced this,
37:07 like moving up, moving up, I'm in the position,
37:10 two ticks later, it rolls over, dies, you're miserable.
37:14 You're now watching this negative number in your portfolio.
37:17 So the buy, stop, limit, or sell, stop, limit order
37:19 will generally keep you out of weaker price action.
37:22 That's a good thing.
37:23 Okay, great.
37:24 The stop loss, I'm not gonna go into
37:26 'cause we covered it the last time.
37:28 And in terms of the exotic order types and routes,
37:32 again, these are for specific use
37:36 at the institutional or large lot level
37:39 that don't necessarily apply.
37:41 It's not a better order type.
37:42 Like when I started getting into this
37:44 and I was making that early transition
37:47 from retail investor to small fund manager,
37:50 or I guess portfolio manager first for a hedge fund,
37:54 I was so excited to get my hands
37:56 on these exotic order types.
37:58 And like 75% of the time,
38:01 I just sit there watching my tickets not fill.
38:06 And it's like, what?
38:07 But this thing is like, you read the description,
38:10 it sounds awesome, constantly blast sweeps,
38:14 the bid-ass spread aiming for excellent execution
38:17 above the mid and blah, blah, blah.
38:19 And it's like, didn't happen.
38:21 I go back to the buy, stop, limit order
38:23 and I be in my position happily.
38:25 So you don't necessarily need them.
38:28 You for sure don't need them for 99% of trading.
38:31 So don't feel like you're missing out.
38:34 They're not overly helpful.
38:35 If you are trading size, yeah, fine.
38:38 You wanna try out an iceberg
38:39 because you wanna buy 10,000 shares of something,
38:43 give it a shot.
38:44 Show 200, show 500 to the market
38:47 and then see how that's picked up
38:50 and how the rest of your size is filled
38:52 if you wanna try that, but you don't need to do it.
38:55 - There you go.
38:55 Again, Ryan, this has been all great tips.
38:59 If I would have known this five hours ago,
39:03 I would have made a different,
39:04 I would have traded differently.
39:06 I would have made a different investment this morning,
39:09 a different order type for that investment, I should say.
39:12 So again, I think it might not be one of the sexiest topics
39:17 that people talk about, order types,
39:18 but I think one of the most useful and tangible episodes
39:23 we've had in terms of I'm sure a lot of people now,
39:25 the next time they go and make a trade,
39:27 which is something they're probably doing every single day,
39:29 we'll be thinking about some of these things
39:31 that we talked about.
39:33 So I can't thank you enough for coming on
39:35 and sharing us some of this knowledge,
39:38 some of this inside baseball from the professional world.
39:41 And again, guys, if you're just tuning in
39:43 for the first time, this is our Kaiju educational series
39:47 we've been doing here at Benzinga
39:48 every Tuesday, 11 a.m. Eastern,
39:50 right here on our Benzinga channel.
39:53 This is part six of eight of the series.
39:57 Check out part seven next week.
39:58 Same time, Ryan and I talk information,
40:01 where to begin your information.
40:02 What do you need? - Next week is Christmas, buddy.
40:05 We're gonna miss you.
40:07 We're off for two weeks.
40:08 - Man. - Two weeks back in the,
40:12 so here's the buy stop limit order
40:14 little Christmas gift for everybody.
40:15 There, try that out.
40:16 Hope it works for you.
40:18 And we'll be back, I think the second week of January,
40:22 back from Geneva.
40:23 I'll have left this place and I'll be back in Switzerland.
40:27 - Beautiful, sorry about that.
40:28 Yeah, we'll be back in a couple of weeks.
40:30 So yeah, make sure- - You're gonna be off too, Aaron.
40:32 You're not trading next Tuesday.
40:34 You're in a food coma at that point.
40:36 - We'll see, I might be going long,
40:38 some of the Santa's sleigh transportation company.
40:43 I don't know, we'll see next week.
40:45 There might be some buying opportunity.
40:47 You know what, my hot tip, my prediction,
40:49 there'll be some BS Santa Claus coin crypto
40:54 that's gonna rally next week.
40:57 And I'll probably be trading that.
41:01 - I'm a seller of that coin, just so we're clear.
41:04 That comes out. - All right, well, here we go.
41:05 We've got a buyer, we've got a seller.
41:07 We've got a market now.
41:09 That's the first step.
41:10 All right, well, Ryan, again, thanks again.
41:12 We'll be back in a couple of weeks.
41:13 If you guys, again, if this is your first episode,
41:16 mark it on your calendar, two Tuesdays from now,
41:18 we'll be back.
41:20 Or I guess, would it be three Tuesdays from now?
41:21 No, two weeks from now.
41:23 But then you guys can always go back
41:24 and watch our former episodes.
41:26 We've talked a lot about, you know,
41:29 just how to set up your portfolio,
41:30 how to set up a strategy,
41:32 kind of all these different things
41:33 that can really help take your trading,
41:35 again, to that next level.
41:37 I'm not saying all y'all are going to try
41:39 to become professional traders,
41:40 but that's not to say you can't use some of these tips
41:43 from the professional trading world in your trading today
41:46 and end up being a little bit more effective,
41:48 maybe making a little bit more returns
41:50 than you already were.
41:51 So Ryan, thanks again.
41:53 Where can folks find more about Kaiju?
41:56 - If you're interested about what we do
42:00 in terms of artificial intelligence in fund management,
42:04 you can go to kcm.ai.
42:07 That's our private fund manager.
42:09 Or for the ETF, I think we're up probably almost 10%
42:14 on the year for our completely autonomous AI curated
42:20 and directed ETF dip.
42:22 You can go to dipetf.com or kaijuetfadvisors.com.
42:27 So it's been a good year for that.
42:30 Entirely self-directed, no human intervention whatsoever.
42:35 So decent proof of concept there if you wanna check it out.
42:38 Predates on low to high mean reversion in S&P 500 stocks.
42:42 Yay.
42:43 So as a compliment to your spy holding,
42:48 something that's a risk of ruin of zero
42:51 and a little extended upside overall.
42:54 - There you go.
42:55 - That's it for me and happy Christmas.
42:58 - Yeah. - Happy holidays.
42:59 - Happy holidays, Merry Christmas.
43:01 Ryan, enjoy the time.
43:03 In North America, it's good to know
43:06 at least we're in the same hemisphere,
43:08 we're in the same--
43:09 - There's snow in the background, there it is.
43:12 - Yeah, there we go.
43:14 But Ryan again, just have a great,
43:17 have a good time off, good time with your family.
43:19 We'll be back in a couple of weeks,
43:20 excited to get back to it.
43:21 Till then guys, stay green, happy trading.
43:24 Ryan, we'll chat soon.
43:26 - Sounds good, take care, Aaron.
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