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Lesson 7: Order Types

Lesson 7: Order Types

By knowing what each order does and how each one might affect your trading, you can identify which order suits your investment needs, saves you time, and reduces your risk.

The term order simply means how you will enter or exit a trade. When you’re trading, you have many types of orders at your fingertips to manage your trades without having to constantly monitor the market yourself.

An order is a request to open or close a trade. You give an order to your provider so that they can execute the trade on your behalf – saving you time, as well as enabling you to lock in profits or guard against loss.

To get the most out of this guide, it’s recommended to practice putting these orders into action. The best risk-free way to test the main type of orders is with a demo account, which gives you access to our trading platform and $10,000 in virtual funds for you to practice with. Get your free demo account.

Once you’ve found a strategy that consistently delivers positive results, it’s time to upgrade to a fully funded live account where you can apply your newfound edge.

Type of Orders

There are three main types of orders: market orders, entry orders, and closing orders. A market order is an immediate instruction to buy or sell stocks and other assets at the best available price. An entry order is an instruction to open a trade when the market hits a specific level, while a closing order is an instruction to close a trade when the market hits a specific level.

Entry orders are used to open a trade at a particular price, without having to constantly monitor the market. Closing orders, on the other hand, are used to lock in profits if a market is moving in your favour or to cap losses if its price moves against you.

Both entry and exit orders come in two different varieties:

  • Stop orders
  • Limit orders

Market Orders

Market orders are executed live on the market at the current price. You're telling the broker that you don't care about the spread as much as you care about entering the market right now. A market order can be used to open or close a trade at the market price.

As the name implies, market orders are Buy or Sell orders at the current market price, used by those who are usually present at their trading station or who have been waiting for particular price action, candlestick pattern, technical indicator, or news event and want to enter or exit immediately.

The main disadvantage is that you don’t know what you’ll be paying. In today's fast-moving market, even the near instantaneousness of an online order isn't fast enough to guarantee that you've locked in the price at which you place your order.

In most cases, you will get close to the buy or sell price you saw when you entered the market order. However, if that asset has high activity, you may receive much less or pay much more.

Though market orders have their uses (they’re good for getting out of a trade quickly if you have a good reason to change your plan for that trade), they can be dangerous for all but the most disciplined, cold-blooded unemotional traders who can think quickly and objectively when their money is at risk. Even if traders have a solid predetermined trading plan, fear, greed, and ego can cause them to abandon it in the heat of the moment via a market order. Thus, a beginner trader and those not yet consistently profitable on a monthly basis should stick with predetermined entry and exit points based on a solid id trading strategy.

Market Order in Stock Trading

Say the bid-ask prices of Tesla shares are $788.50 and $788.80, respectively, with 100 shares available at the ask. If a trader places a market order to buy 500 shares, the first 100 will execute at $788.80.

The next 400, however, fill at the best asking price for sellers of the next 400 shares. If the stock is very thinly traded, the next 400 shares might be executed at $$788.90 or more. This is precisely why it’s a good idea to use limit orders for these types of securities.

The trade-off is that market orders fill at a price dictated by the market as opposed to limit orders, which provides traders more control. Using market orders can sometimes lead to unintended, and in some cases, significant costs.

Entry Orders

Unlike market orders, entry orders (or entry limit/stop orders) are pending orders entered in advance to enter or open a new position at some future price that the trader deems more favorable than the current price. These will execute automatically and don’t require any action from the trader at that time. This ability to choose entry points in advance is very valuable for two reasons:

  1. You can enter these orders at your convenience, whenever you have time. That’s important for those with limited free time to trade yet want to enter at a certain price level or better. This is an essential feature even for full-time traders (never mind those with jobs and lives beyond trading) because they can’t be available 24 hours a day.
  2. It removes emotion from entry decisions, and that, friends, is critical. Like drinking and driving, trading and emotion don’t mix. When they do, you risk becoming roadkill. Few can avoid the pull of fear or greed when trading in real-time with money at stake. You want to do your technical analysis and objectively choose entry points isolated from the pull of fear or greed that might make one hesitate to seize an opportunity. You don’t want to jump in when it’s too late or too early.

Limit and Stop orders to open a position

Unlike market orders, entry orders are pending orders entered in advance to enter or open a new position at some future price that the trader deems more favorable than the current price. These will execute automatically and don’t require any action from the trader at that time.

  • A limit order is visible to the market and instructs your broker to fill your buy or sell order at a specific price or better.
  • A limit order has the price guaranteed but not the execution and can be partially filled or not filled.
  • A stop order isn't visible to the market and will activate a market order once a stop price has been met.
  • A stop order avoids the risks of no fills or partial fills, but because it is a market order, you may have your order filled at a price much worse than what you were expecting.

Buy Limit

Buy Limit is an entry order to open a position at a future price below the current price, typically used by bargain hunters seeking to buy on a pullback from the current price at what they believe is at or near a level that has served as a floor or support in their chosen time frame, be it an hour, day, week, month, year, or longer. They are seeking to buy low and sell high.

Buy Stop

Buy Stop is an entry order to buy at a future price above the current price, typically used by traders who believe that once price breaks above a certain price level that has served as a ceiling or resistance level in the past, the price should continue a sustained move higher. Their goal is to buy as the price begins to make a sustained move higher.

Sell Limit

Sell Limit is an entry order to short at a future price above the current price, typically used by bargain hunters seeking to go short at what they believe is at or near a price level that has served as a resistance in their chosen time frame. They believe that around this price level the market will start to drop. They are hoping to sell high and buy low.

Sell Stop

Sell Stop is an entry order to sell at a price below the current price, typically used by momentum-type short-sellers, those who believe that once the market breaks below a price that has served as a support in the past, the pair will make a sustained move lower.

The Sell Limit and Sell Stop orders are available when trading CFDs or other types of derivatives.

Exit Orders

There are 2 types of orders to exit a position: Stop Orders and Limit Orders.

The main difference between them is whether you’re closing a losing trade to cut your losses or a winning trade to take profits. Following is a summary.

Limit Orders (Take Profit Orders)

Limit orders are typically those that are used to exit the market in profit. If you're going long, the limit order will be above the market price, and if you are going short, the limit order will be below the market price. Think of a limit order like a finish line. Your trade will be closed when the market price crosses the limit order, and your profit will be realized in your account balance.

Stop Orders (Stop Loss Orders)

A stop order is also an exit order that will close your trade. Commonly referred to as a stop loss order or a protective stop order, this type of order is intended to limit the amount of loss incurred by your trade. A stop-loss order will close your trade at a designated level of loss. Stop losses can also be used to lock in gains as your trades progress into profit. Stop losses can be painful when they're hit, but they'll keep you in the trading game longer than if they're not used.

As the name implies, stop loss orders are pending orders that automatically close your position to stop a loss from getting any worse than your predetermined maximum amount you were willing to risk. That maximum may be determined by either:

  1. Risk management considerations: broken price support of some kind or other indications that you were wrong about the price direction.
  2. Money management considerations: you don’t want to lose more than 1 to 3 percent of your account on any given trade.

There are two basic kinds of stop loss orders:

  1. Fixed or Simple Stop Loss: This order automatically executes when a fixed predetermined loss is reached or if the market gaps past it, and the loss is exceeded. Any good trading platform will allow you to set that loss in terms of pips, cash loss, or percentage loss from your entry price.
  2. Trailing Stop Loss: As the name suggests, this kind of stop loss order trails or follows the price as it moves further in your favor, and it automatically closes your position after the price moves against you by a fixed number of pips, cash amount, or percentage change in price against you. Thus, the trailing stop loss not only limits losses but also locks in gains from winning trades that have started to reverse against you by more than what you believe to be normal random price movements or “market noise.”

How to Place an Order

Trading orders are relatively simple to place, subject to the company. The following guidelines use the CAPEX WebTrader platform, but should be comparable throughout all major platforms:

Orders in trading
Source: CAPEX WebTrader
  1. Choose the direction of the trade (Buy or Sell).
  2. Choose between Market, Limit, and Stop to open the trade.
  3. Specify the price level, above/below the current market price in case of Limit or Stop orders.
  4. Optional, set Stop Loss and/or Take Profit orders to exit at pre-defined levels.
  5. Submit order.

Summary

Depending on your investing style, different types of orders can be used to trade stocks more effectively.

  • A market order simply buys (or sells) shares at the prevailing market prices until the order is filled.
  • A limit order specifies a certain price at which the order must be filled, although there is no guarantee that some or all of the order will trade if the limit is set too high or low.
  • Stop orders, a type of market order, are triggered when a stock moves above or below a certain level; they are often used to ensure against larger losses or to lock in profits.

It’s important to remember that you should familiarize yourself with the trading platform you are working with before undertaking any form of trading activity. This can help minimize any impractical errors when executing or managing a trade.

Free trading tools and resources

Remember, you should have some trading experience and knowledge before you decide to trade with real money. You should consider using the educational resources we offer likeCAPEX Academyor ademo trading account. CAPEX Academy has lots of courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader.

Our demo account is a great place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.

Frequently Asked Questions (FAQs)

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

Whereas a market order is a request to buy or sell a stock immediately, a limit order will only execute a purchase or sale at a specified price or better. For instance, if a stock is currently selling for $50 a share, you could set a buy limit of $45. Your order would not execute until (and only if) the stock drops to $45 or lower. A market order, on the other hand, would immediately put you in the queue to buy the stock at $50.

What are the best buy and sell orders in stocks?

Different circumstances call for different types of stock orders, and there is no one right type of order for every trader in every situation. Market orders are the riskiest type of order because you can end up paying much more than you planned or selling much lower than you'd hoped. Serious traders should familiarize themselves with different types of buy and sell orders in stocks and learn how each type of order works and when to use them.

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