FOK Orders in Stock Trading
FOK stands for “fill or kills”, while IOC stands for “immediate or cancel”. Today we’ll take an in-depth look at all you must know about FOK orders in stock trading.
You must fill FOK orders in their entirety, or they are cancelled. This type of order is proper when you want to ensure that you get a special price for your stock and don’t want to risk the order being canceled if the stock’s price moves against you.
For many years, most investors who have traded stocks and forex have never come across such an order type. This article will explain:
- What FOK orders are,
- when you should use them and
- why they are so misunderstood by most new traders who misuse them almost every time.
What is a FOK order?
If you have been trading for any time at all, you will have heard of the term “FOK”. It stands for Fill or Kills and is an order type used to buy or sell securities. When using a FOK order, the trader specifies the maximum number of shares (or contracts) they are prepared to purchase (or sell). It is cancelled if you cannot fill the order immediately at the desired price.
FOK orders can help traders avoid being taken advantage of by market makers or other traders who might try to “ride” their stops. Using FOK orders can be a valuable way to protect stop-losses and limit losses on open positions.
Let us look at an example:
You have opened a long EUR/USD position, and you want your stop loss at 1.1336 if the price moves against you for any reason (technical or fundamental). Let’s say that after opening the trade and placing your desired stop loss level, nothing has happened yet, meaning that currently, the price is still about 1.1350 – 1.1360 area which is the exact level where the order should be placed to avoid moving against your stop prematurely. On top of that, after you place your order, there happens to be a large purchase (or sale) order executed at 1.1336, which would trigger your stop loss if it was still there.
In this type of situation, the market is unfair, and you can get stopped from your trade prematurely because of somebody else’s order. This is where a FOK order comes in handy!
Using a FOK order with a limit price of 1.1350 – 1.1360, you are telling the market that you are only willing to buy (or sell) up to a certain number of shares (or contracts) at that price. So, if someone else’s order at 1.1336 gets filled, your FOK order will be cancelled because it is now lower (or higher)than the limit that you specified.
OK, this is how a FOK order works in theory, but what about in practice?
Well, we have to say that we have used this type of order many times over the years, and it has never failed us. The reason for that is because market makers (or other traders) know that if they hit your stop loss level with their big order, they will also fill your FOK order. This way, they can scalp a few pips off you (or give you a few pips) while at the same time not triggering your stop loss.
The disadvantage of using FOK orders?
The downside of using a FOK order, though, is that you may not get filled at the desired price if there are no orders around. This is why we like using this type of order when our market analysis tells us that there will be a lot of activity (more than usual) around the level where we want to place our stop loss.
When To Use FOK Orders
Some traders use this type of order on every trade they open, but we prefer only using it on trades with potential volatility or large price movements. Another situation when FOK orders are valuable is during news releases. Big news events typically cause sharp moves in the markets, meaning that if you don’t have any pre-planned stops in place, your chances of getting stopped out prematurely are much higher.
What Are The Drawbacks Of Using A FOK Order? The main drawback of using a FOK order is that you may not get filled at the desired price if there are no orders around. This can be especially true during low liquidity times such as overnight or over the weekend.
Remember that if you have a large number of shares (or contracts) that you want to trade, your order may not get filled immediately, which could result in you getting cancelled out of the trade.
I would say that FOK orders are great for protecting your stop losses and limiting your losses on open positions. Still, it would be best if you only used them selectively, depending on market conditions and your trading style. If you are a novice trader, it’s advisable to speak to a reputable advisor, like the brokers at Saxo Bank, to help you get started.