Last Updated on 21 September, 2020 by Therobusttrader
Trading, like all things, is ever-changing. In order for traders to have more control over how they trade, brokerages provide various different order categories and types. An example of this is the Day order which expires once the trading session is over. Another order, albeit used less than the Day order, is the GTC order (Good Till Canceled).
A GTC order, which stands for “Good Till Canceled” is an order form used by traders and investors. Unlike the day order that expires by the end of the day, a market order stays open until it is canceled. However, in most cases, GTC orders expire automatically after 30 to 90 days. GTC orders can be used to enter as well as exit a trade.
Contrary to the Day order, a GTC order stays open until either all of its conditions are met or the trader him/herself cancels the order. GTC Orders usually require more attention from the trader since changing market conditions could make their order worthless.
How Long Does a GTC Order Last?
Contrary to popular belief, there are multiple ways through which a GTC order can end. Of course, the most obvious one is that you cancel your GTC order. In this case, the order can last as long as possible, but usually, there is a limit set at 30 to 90 days, when the broker automatically makes the order expire.
Another way a GTC order could end is if all of the order conditions are met. In this case, the order is considered completed. For example, if you want to purchase 5000 shares of Microsoft at the market rate, the order will stay open until all of the shares have been bought. Then, the order will be considered complete.
GTC Order Example
Let’s take the example of Microsoft from above. At the time of writing, one share of Microsoft (MSFT) was trading around $138.25. You could purchase the shares at market price, but you can also set another condition if you please.
Suppose you create a GTC order to purchase 5000 shares of Microsoft at a price of $137.50 or below. This order will now stay open for as long as the price of the stock stays above the aforementioned price. If the price does dip below $137.50, the shares will be purchased and the order will be filled.
Suppose the price dips below the tipping point for a few seconds and you are able to purchase 3000 shares in that timeframe. The GTC order will stay open until the remaining 2000 shares have been bought. If you cancel the order right now, you will only have 3000 shares of Microsoft in your portfolio.
A Day order, on the other hand, will end at the end of the current trading session no matter what. It does not matter whether your broker was able to acquire 0 shares of Microsoft at or below your stated price or 4000, the order ends as soon as the markets close.
Why Use a GTC Order
Although most people use Day orders, here are a few reasons why a GTC order might be better for you:
You Trade Based on Intrinsic Value
Not all traders trade based on charts and indicators. Some traders look at the financial statements of the company and try to determine its intrinsic value (value of all its assets). After that, they compare that value with the market price and decide whether or not to purchase the security.
These traders can use GTC orders to set a limit order at the price they feel the stock is worth buying. That way, the order will be executed right when the stock is trading for as much as they are ready to pay for it.
You Want to Cash In Your Profit
It is understandable why some people may not be comfortable with a GTC order when first opening a trade. GTC orders can often end up costing you a lot of money unless they are carefully monitored. However, the situation changes if you use a GTC order when closing your position.
Sometimes, a GTC order can be more convenient than a day order. Suppose you bought a stock at $100 and it is now trading at $104.50, and you have set your profit target at $105. What you can do is place a GTC limit order at $105. This way, your shares will be sold whenever the market price of the stock rises above your limit price.
Closing your position through a GTC order can be a great way to make sure you rake in the profits without having to worry about placing a new order every single day!
Risks of a GTC Order
A GTC order has negatives just like it has positives. Here are some of the risks that you need to be aware of when using a GTC order.
Trade Executed at the Wrong Time
One of the biggest risks of GTC orders is when there is extreme volatility that pushes the price beyond the GTC limit order, to then quickly revert. In such cases, the sell order might trigger and get you out right at the reversal. Now if you wanted to get into the position again, you would have to enter the position at the higher price. However, this is a risk that you do face with day orders as well, but the longevity of the GTC order makes it more likely that you will experience events like these.
It is for reasons like this that a few exchanges (including the NYSE and NASDAQ) do not accept GTC orders anymore. However, most brokers are still able to execute your GTC orders internally and allow you to place them on the aforementioned exchanges.
Not allowing GTC orders also relieves the market from some of the sell-offs that could occur if many GTC limit orders were placed around the same level. If the security hit this level where many market participants have placed their GTC limit order, that would massively increase supply which could cause a quick fall.
Just because you have a GTC order, it does not mean you do not need to monitor it. Most GTC orders are set to cancel between 60-90 days. During that time, it is still possible for your order to not be worth it anymore for a number of reasons. In that case, it is important to cancel your order immediately.
GTC orders are a good alternative to day orders. However, they should be used only in certain situations. A GTC order has its positives but it also has its risks. As such, a GTC order is all about managing its risks while taking advantage of its benefits.
Remember that new traders should probably avoid indulging in GTC orders until they have some experience under their belt. Only once you are comfortable with the mechanics of monitoring a live day order you could open up your first GTC order.
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