What is the difference between pending orders and eating orders in contract trading?

By using pending and eating orders, traders can manage risk, time market entries and exits, and profit from both market trends and volatility.

Feb 21, 2025 at 03:48 am

Key Points:

• Definition of pending orders and eating orders
• Types of pending orders and their advantages and disadvantages
• Types of eating orders and their advantages and disadvantages
• Strategies for using pending orders and eating orders effectively
• Examples of how to use pending orders and eating orders in real-world scenarios

Content:

1. Definition of Pending Orders and Eating Orders

• Pending orders: Orders that are placed with a brokerage or exchange that do not execute immediately. Instead, they activate when the market conditions specified in the order are met.
• Eating orders: Orders that are entered at a price that is worse than the current market price. Used by market makers to extract profits from the bid-ask spread.

2. Types of Pending Orders

• Limit orders: Orders placed at a specified price or better. Buy limit orders execute only at or below a designated price, while sell limit orders execute only at or above a designated price.
• Stop orders: Orders that activate when the market price reaches a trigger price. Buy stop orders execute at or above the trigger price, while sell stop orders execute at or below the trigger price.
• Market order: Orders that execute immediately at the current market price.

3. Advantages and Disadvantages of Pending Orders

Advantages:

• Control over execution: Allows traders to specify the price at which their orders are executed.
• Risk management: Can help to protect profits or limit losses by setting stop-loss orders.
• Timing strategies: Can be used to execute trades at specific times or when certain market conditions are met.

Disadvantages:

• Not guaranteed execution: Market conditions may change before the trigger price is met, resulting in the order not being executed.
• Can be difficult to manage: Requires a good understanding of market dynamics and technical analysis.

4. Types of Eating Orders

• Market-on-open (MOO) orders: Buy or sell orders that execute at the opening price of a trading session.
• Market-on-close (MOC) orders: Buy or sell orders that execute at the closing price of a trading session.
• Fill-or-kill (FOK) orders: Orders that must be executed in full immediately or they are canceled.

5. Advantages and Disadvantages of Eating Orders

Advantages:

• High probability of execution: Market-on-open and market-on-close orders have a high probability of being executed, especially if they are placed before the start or end of a trading session.
• Fast execution: Fill-or-kill orders ensure immediate execution or cancellation, reducing slippage.

Disadvantages:

• Not guaranteed execution: MOO and MOC orders may not be executed if the market opens or closes at a price far from the order price.
• Can result in slippage: FOK orders can lead to slippage if the market price moves against the trader during execution.

6. Strategies for Using Pending Orders and Eating Orders Effectively

• Use pending orders for risk management: Set stop-loss orders below support levels to protect profits and limit losses.
• Use eating orders for market timing: Place MOO or MOC orders at key price levels to execute trades when the market opens or closes at those levels.
• Use FOK orders when immediate execution is required: Use FOK orders for scalping strategies or when a fast entry or exit is essential.
• Combine pending orders and eating orders: Create complex strategies by combining different order types to take advantage of specific market conditions.

7. Examples of Using Pending Orders and Eating Orders in Real-World Scenarios

• Limiting losses after a breakout: Place a stop-loss order below a key support level to limit potential losses if a breakout fails.
• Exiting a position before earnings: Place a sell MOO order at the market open on the day of earnings to exit a position before volatility spikes.
• Entering a trade at the opening bell: Place a buy MOO order at a key resistance level to enter a trade if it breaks resistance on open.
• Scalping a moving average range breakout: Place a buy FOK order slightly above the moving average resistance and a sell FOK order slightly below the moving average support to scalp a breakout.

FAQs

Q: What is the best type of pending order for risk management?

A: Stop orders are typically the best type of pending order for risk management as they allow traders to specify a specific price at which to close a position if it moves against them.

Q: What is the difference between a limit order and a market order?

A: Limit orders execute at or better than a specified price, while market orders execute immediately at the current market price.

Q: When should I use a fill-or-kill order?

A: Fill-or-kill orders should be used when immediate execution is required, such as in scalping strategies.

Q: What is the purpose of an eating order?

A: Eating orders are used by market makers to make a profit from the bid-ask spread by placing orders at prices that are marginally worse than the current market price.