As online trading technology has helped close the knowledge gap between retail traders and big institutions, it’s become easier for retail traders to use more advanced strategies in their trading. One of the ways people use these advanced strategies is the utilization of different order types.
But just because you can use many kinds of order types in your trading, doesn’t mean you should. Here’s a rundown of the major order types, and what they’re best used for.
Market orders are the simplest, most intuitive order types. A market order simply means that you want the trade to be executed immediately at the best available price in the market. If the market for a particular stock, ETF, or other security is liquid, market buy orders often get executed almost immediately at or near the ask price.
The advantage of a market order is speed. If you want in or out of a position immediately, a market order is the way to go. The disadvantage of a market order is price. Depending on the size of the order and the number of available shares at the ask price, your order may not get the exact price you were hoping to get filled at.
The other most common type of order is a limit order. When you place a limit order, you’re placing a limit on the maximum you’re willing to buy at, or the minimum you’re willing to sell at. For example, if you place a limit buy order for a stock with a limit price of $25 per share, the order will only be filled if the stock falls to, or below, $25.
The advantage of limit orders is that you have complete control over the price at which a trade is executed. The disadvantage is that, if a stock doesn’t meet the limit price condition, a trade may take a while to get executed. If the stock never reaches the limit price, the order will never get executed at all.
Limit orders will naturally cancel after 180 days, or you can make it “Good Till Cancelled” if you want the order on indefinitely.
In a way, stop orders are almost a combination of a limit order and a market order. Much like a limit order, a stop order allows you to select a price at which the order will be triggered. However, like a market order, once the order is triggered, it is immediately fully executed at market price.
Many traders use “stop loss” orders to protect long positions from large, unexpected drops in share price. Stop loss orders are sell orders with a stop price slightly below the current share price of the stock. For example, you’re long a stock that is worth $27 per share, you might set an order to sell at a stop price of $25. If the stock subsequently drops to $25, the trade is immediately executed at market price.
Momentum traders also use a “trailing stop” order as well. A trailing stop order allows the trader to set a stop loss price at a certain percentage or dollar amount below the current share price. As the stock continues to rise, the trailing stop will rise along with it, maintaining the specified spread. However, if the stock falls, the trailing stop will remain steady until it is triggered.
In addition to the three most common order types mentioned above, traders can also combine order types to execute specific trading ideas. For example, a stop limit order can allow traders to buy or sell stocks only in a particular price range.
In addition, market “If Touched” orders are a type of market order that only get executed if a particular price it touched. A market If Touched order is similar to a stop sell order, except it is placed above the current share price rather than below it. These If Touched orders provide traders with another way to take advantage of large, short-lived swings in share price.
When making a trade you should always be thinking about your entry and exit points, and a lot of that has to do with the type of order you’re using. So before you pull the trigger, take a second to consider which one is right for you.
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