In this case, when we venture in the financial markets we do not just decide on which stock or asset to sell or buy. There is also a need to determine the manner in which a trader desires the trade to be carried out, and herein lies the trading order types. A type of order is basically what you tell your trading platform or your broker on how to either enter or exit a trade. Learning the various types of orders is very important both to a new trader and a seasoned trader since the manner in which you place your order may affect not only your entry price but also your risk exposure and your entire trading plan. Whether you need accurate control or speed, the correct order type can produce a vast difference in your trading results. This article will discuss the four primary trading order types, which are; market order, limit order, stop order, and stop-limit order and how and when to use each order wisely.
Market Order
The simplest and most popular type of trading orders is a market order. When a trade places a market order, he/she is telling the broker to immediately buy or sell the order at the best current market price. Such order focuses on speed rather than price, i. e. it will be filled fast but not necessarily at the very price the trader might have viewed when he/she placed the order. Market orders are most appropriate where the market is very liquid and price slippage is not much.
To illustrate this point, say you would like to buy stocks of a blue-chip company such as Apple or Microsoft and you are not as interested in getting the optimal price, but rather in getting into the market at the earliest opportunity, a market order would suit you well. In volatile or high-paced markets, however, the execution price may be very different than it was supposed to be. This may be dangerous in the time of big news or low liquidity. Although it is a simple tool in executing trades instantly, a market order is effective in markets where timing is of critical importance.
Limit Order
A limit order provides the trader with a greater control of the price where the Free Trades to Learn occurs. In a limit order to buy, the trader stipulates that the asset will only be sold at a particular price up to which the trader is prepared to purchase it. In a sell limit order, the trader puts a price limit of a level where he or she wishes to sell. The prime benefit of a limit order is that price, rather than execution is assured. That is, your trade will be filled only in the event that the market hits your specified price–and you are not guaranteed that it will be filled at all. Limit orders are specifically valued by traders who wish not to experience slippage or when the trader is seeking a particular price.
To illustrate, when a stock is at a price of 150 and a trader wishes to buy it only when it falls to 145, he or she can sell at a buy limit order of 145. The order will not be closed at the price of the stock but until the order is canceled. Swing traders and long-term investors tend to use limit orders as they are waiting to reach a good entry position or exit position. They are also popular with volatile markets so that they do not overpay or under sell.
Stop Order
A stop order, also commonly known as a stop-loss order, is a common method of placing an upper limit on the amount of losses one can incur on a trade, or to take a profit shield. When a certain price level known as the stop price is reached it becomes a market order. The typical stop order to sell would be placed below the current price to help prevent the downside risk, whereas the typical stop order to buy would be placed above the current price to enter the position in case the market is strong. An example of this is when you have a share that is worth $200 but you wish to reduce your loss in the event of a price reduction, you may issue a stop sell order at $190. When the price drops to: 190, your stop order would turn into a market order and would be filled at the highest available price.
Such an order is imperative in the management of risks particularly in volatile markets where the price changes can occur within a short time. But as the stop order changes into a market order when it is activated, it could be susceptible to slippage and the price at which it is finally executed might not be the same as the stop price. This risk notwithstanding, traders have been embracing the use of stop orders to execute their exit strategy and prevent the impulsive decision making on the pressure.
Stop-Limit Order
A stop-limit order is a mix of a limit and a stop order. It is more accurate in that the trader enter a stop price that activates the order and a limit price where the trade is to be closed. A limit order, not a market order is created when the stop price is met. This implies that it will not get executed until and at the mentioned limit price or higher. Although the type of order does provide greater control and could help to avoid undesired slippage, there is also the possibility that the order will not be executed at all as the market could move well beyond the limit price.
To illustrate, say a stock is selling at 100 and a trader wants to sell it should it fall to 95 and not below 94. It is possible that they can put in a stop-limit order with a stop price of 95 and a limit price of 94. When the stock reaches that level of $95, the order is triggered, but only in case that the stock can reach 94 or higher. Stop-limit orders come in handy especially in volatile markets or those that move at a high rate where traders need to strike a balance between protection and price accuracy.
What Kind of Order Type to Use in Your Strategy?
The magic behind effective trading is to ensure the matched order execution with your kind of trading style, risk management, and market environments. Market orders suit well when there is a need to either enter or leave the market fast and when the market being dealt with is liquid. Limit orders provide you with price control yet your order may not be filled. Stop orders are critical to risk aversion to losses but risk slipping. Stop-limit orders are more specific and they need an excellent knowledge of market behavior. There are advantages and disadvantages of each type of order and to make it efficient involves practice and discipline. Through the knowledge on how these four trading order types operate, you become more in charge of your trades, better your execution strategy, and advance your overall performance in the financial markets.