What is Time In Force in Stock & Options Trading?
Time in force is a special instruction used when placing a stock or options trade. It specifies how long an order will remain active before it is executed or expires. These instructions are especially important for active traders and allow them to be more specific about the time parameters. Common examples include immediate-or-cancel (IOC) or day order (DAY).
A Time-in-Force order is placed by an investor that wants to buy or sell an option or security. Usually, at a value that is above or below its current trading price. Time-in-Force instructions allow traders to specify the duration that order will remain active. Setting these limits can make managing trades easier, especially for active traders. Using these instructions can help avoid having a trade executed beyond a certain cutoff. It is convenient because you don’t have to later go in and cancel existing orders one by one. Also, you don’t have to worry about trades being executed accidentally.
Time In Force Basics
Time in force orders is a useful way for active traders to keep from accidentally executing trades. It allows them to set time parameters. As a result, traders don’t have to remember to cancel old trades. Unintended trade executions can be very costly if they occur during volatile market conditions when prices are rapidly changing. So, most active traders use limit orders to control the price that they pay for a stock. One way is to set a time in force instruction in place to control how long the order stays open.
There are several different types of time-in-force orders that traders can use. Some brokers only offer a limited set of order types. However, active traders often are given more choices. Many brokers use acronyms like DAY, GTC, OPC, IOC, GTD, and DTC to refer to these orders.
Time in Force Instruction Types
Day Only (DAY)
Day orders are a popular type of time in force order. They are canceled if the trade does not execute by the close of the trading day. These are often the default order type for brokerage accounts. This is an order to buy or sell an asset that expires automatically when execution has not been carried out during the specific day of execution. Basically, when a day order is not filled, it’s canceled.
Modern trading platforms have day orders as default order duration. This means that it’s placed as the default time frame for all buy or sell orders. One thing you need to know is that orders are good only for the current trading day. They are canceled automatically at the end of the trading day if they have not been filled. Investors and traders use day orders to place an order for a stock at a specific price point eliminating the need for the trader to monitor it until execution.
Fill or Kill (FOK)
This refers to a Time in Force option used in stock trading. It instructs brokerage firms to execute transactions immediately and completely or not at all. It is used by active traders and is usually designed for large quantities of stock. This order must be filled or canceled in its entirety. The purpose of a Fill or Kill order is to make sure that traders are able to enter a position at the desired price.
Sometimes, it can take a lot of time to execute large orders completely. Basically, the fill or kill order is a tool for buyers or sellers to place all possible orders and cancel the rest. Unfilled orders are canceled if the entire order does not execute as soon as it becomes available. Often, these are used to avoid purchasing shares in multiple blocks at different prices. It helps to ensure an entire order executes at a single price. These can be popular during fast-moving markets. Day traders always want to ensure that they get the proper price on each trade.
Immediate or cancel (IOC)
This refers to an order to buy or sell securities that are normally executed immediately. If any orders are not immediately filled, they are canceled. It is one of the many duration orders traders and investors use. IOC specifies how long a trade should remain active when it’s supposed to be canceled. It is a common practice among investors to indicate a minimum or maximum price of a sell order.
Good ‘Til Canceled (GTC)
This is a type of Time in Force duration instruction. It is placed by investors who want to purchase or sell securities at a particular price. The order remains active until it’s rescinded by the investor or executed. It offers an alternative to setting different day orders that expires after the end of every trading day. The tool eliminates the chances of orders being left open which can pose a huge risk. That is why GTC orders are set to expire after 30 to 90 days. However, some common exceptions include stock splits, distributions, account inactivity, modified orders, and quarterly sweeps. Nevertheless, these instructions are useful for a long-term investor. One who is willing to wait for a stock to reach its desired price point before pulling the trigger. Sometimes, traders might wait days or weeks for a trade to execute at their desired price.
Good ‘Til Date (GTD)
Good ‘Til Date refers to an order that remains working in the system and marketplace until it executes. It may also execute until the close of the market on a specified date. To place the order, select the Good ‘Til Date option from the Time in Force options. This should be followed by the addition of the execution date and time. If you don’t set a specific time zone, the system will use the current time zone set on your computer. (Source: warriortrading.com)
How to Use Time in Force Orders
Time in force orders can be combined with other types of orders to manage your investment strategy. For example, you can use them with:
- Market orders – A market order is an order to buy or sell a security at the best available price. Most market orders are typically day-only orders. The goal is typically executing the trade as quickly as possible at the most favorable price. If you’re day trading in a brokerage account, day-only may be your default time in force order setting.
- Limit orders – Limit orders are also orders to buy or sell. But, in order for the trade to be executed, it has to be at a specific limit price or better. Buy limit orders usually direct your broker to purchase a security at or below the current market price. Sell limit orders direct your broker to sell securities at or above the current market price. A fill or kill order is a type of limit order. You are essentially telling your broker to fill the order immediately at a set price or to cancel it entirely.
- Stop orders – Stop orders let you direct your broker to buy or sell securities once they’ve reached a specific stop price. Stop orders can be combined with good until date orders or other time in force orders. These instructions are a way of helping to manage price volatility.
Example of Time in Force
For example, Daytradrr believes the price of stock ABC will rise but it will take time, approximately three months. ABC is currently trading at $20. So, Daytradrr purchases ABC call options with a strike price of $25 and places a Good ‘Til Cancelled (GTC) order. To avoid having the order remain on hold indefinitely, Daytradrr places a limit of three months on the order. After three months, stock ABC’s price is still struggling to break past the $22 mark. As a result, the order is canceled automatically.
By setting time limitations for each order placed, traders can prevent trades from executing beyond a certain time. Also, time in force orders also eliminates the need to cancel existing orders manually. Regardless of which time in force orders a trader might use, the purpose is more or less the same. It allows investors to productively spend their time monitoring market activity. Instead of focusing on manual trading activity. By setting specific end dates for trades, traders have less to worry about. Their trades won’t execute beyond the particular time frames they set in advance. This can be especially helpful for active trading and tracking the movements for a wide variety of securities.
Day trading can be summarized simply as buying security. Then, quickly selling or closing out the position within a single trading day. Ideally, day traders want to “cash-out” by the end of each day with no open positions This lets them avoid the risk of losses by holding security overnight. Day trading is not for everyone and carries significant risks. It requires an in-depth understanding of how the markets work and various strategies for profiting in the short term. Short-term profits require a very different approach compared to traditional long-term, buy and hold investment strategies.