Futures Markets - Part 12: Stops, limit orders and trading limits: a Safety Net for Futures Traders

Futures Trading Short Course

Through the control offered by the exchanges, and government regulation, trading in the commodities markets does offer some limited protection from manipulation. The use of prudent orders does also offer some protection from loss.

The Short Futures Position

This simply means taking a short position in the hope that the futures price will go down. There is nothing to borrow and return when you take a short position since delivery, if it ever takes place, doesn't become an issue until some time in the future.

Limit and Stop-Loss Orders

"Limit orders" are common in the futures markets. In such cases, the customer instructs the broker to buy or sell only if the price of the contract he is holding, or wishes to hold, reaches a certain point. Limit orders are usually considered good only during a specific trading session, but they may also be marked "G.T.C." good till canceled.

Maximum Daily Price Moves

Sometimes futures prices in certain markets will move sharply in one direction or the other following very important news extremely bad weather in a growing area or a political upheaval, for instance. To provide for more orderly markets, the exchanges have definite daily trading limits on most contracts.

Most futures exchanges use formulas to increase a contract's daily trading limit if that limit has been reached for a specific number of consecutive trading days. Also. in some markets, trading limits are removed prior to expiration of the nearby futures contract. For other contracts, including stock index and foreign currency futures, no trading limits exist.

The Commodity Exchange Act

Trading in futures is regulated by the Commodity Futures Trading Commission, an independent agency of the United States government. The CFTC administers and enforces the Commodity Exchange Act.

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