Order Types

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Order Types

In this video Ross, from Warrior Trading talks about the different order types that active traders have at their disposal when trading. This includes market, limit and stop orders when active trading.

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Hey everyone, Ross here from Warrior Trading. I want to talk about the different order types that you have at your disposal when you're taking a trade.

Now it doesn't matter whether you're taking a day trade, a swing trade, or you're buying a long term investment, these are still order types that you have to consider. Now the three order types that we look at, the first one is a market order. Now the way a market order works is you say I want to get into this stock by buying X number of shares and I don't care what price I'm going to get in at, I will get in at market price. The risk with a market order is that if you accidentally have a typo in the number of shares you type, instead of typing 10,000 you type 100,000, and then you press the buy button, now the computer systems that take in all these orders, their job is to execute your order and buy 100,000 shares at current market price. If there are not currently 100,000 shares for sale at the current price, then you'll buy all the shares for sale at that price and all the shares the next penny up, the next penny, next penny up, next penny up. What you might see is you go, you end up buying at 25, 30, 40, 50 even 75 cents or a dollar higher than the current market price.

Most active traders would not want to use a market order because the risk that you could get filled at a really bad price is simply too high. What we will instead use are limit order. By using a limit order we're still saying we want X number of shares, but we're saying we won't pay a penny more than this limit price. When we look at the order entry window, and I'll do this on my computer so you can see, in the case of ZVZZT, the Nasdaq test stock, the current price is $10.02. If I want to buy this, if I want to buy 10,000 shares, that could be a problem because there are not 10,000 shares for sale right here. If I press buy just like this, this might not let me do it, no it did. Because this is the test stock it just went ahead and placed the order, but if this was an actual stock, I would not have been able to fill all the shares at $10.02. I would have filled at $10.02, $10.03, $10.04, maybe even all the way up at $10.42, and I would have gotten a really bad fill.

Instead, and that's if I had used a market order, with a limit order by putting it at $10.02, if I had done this with real money, most likely I might have filled 600 shares at $10.02 and then the rest would have been sitting there as a buy order waiting for maybe some people to sell me shares at that price. By using a limit order what I'm doing is I'm saying the most I'm willing to pay is this price right here. Some people get this confused and they think that the order will not go through until this price. That's not true. A limit order is the most you're willing to pay. As soon as you press the buy button, this order will get sent to the market and you will start getting shares up until the top of your limit price.

On the other hand, when you want to go ahead and sell the stock, I could put an order down here. If I put an order to sell it at $10.05, obviously the order is just going to sit there because the current price is $10.01 by $10.02. If I want to sell it at $10.01, what I'm going to need to do is cancel that open order right here by right clicking and going cancel, and then bring my limit order down to let's say $10.00. Maybe even I go a little below at $9.98. Then I will type in my 13,000 shares sell order and there we go, I'm out and I got filled mostly at looks like 99 or so. All right. This is what most traders are going to use.

Now in addition to market orders and limit orders, you have what are called stop orders. This is the third type of order. A stop order is an order that will not trigger until the price crosses a certain price, a price that you determine. What I could do in the case of ZVZZT is I could say, let's say I want to buy this, but I don't want to buy it until it crosses $10.05. So, I'm going to change the order type to a stop limit order and I'm going to put my stop price at $10.05. Now if I use just a regular stop order then it's going to be a market order as soon as $10.05 hits. So, I might get filled at $10.10, $10.15, $10.20. So, I'm going to use a stop limit order to limit the upside of what I'm willing to pay. The stop price is the trigger price and the limit are the most I'm willing to pay. If I do this and I press buy, that order will sit there, because it's a day order, it will sit there for the rest of the day. If the price breaks $10.05, my order will get sent to the market, but I will not get filled any higher than $10.10.

On the other hand what you could do, this is called a buy stop order. I'm going to go ahead and cancel it. The other thing that you could do is you could do a traditional stop order. I'm going to get in this here just buy 3,000 shares. Let's see, let me switch that here. Switch to limit and buy. Okay. Nasdaq. Oh ZVZZT. Maybe that was the problem. All right, buy. There we go. I've got my 3,000 shares now. Let's say I want to use a stop order to control my downside risk. What I can do is I can say let's put a stop order at $9.99 with a limit of $9.90 and press sell. Now, if the stock drops below and triggers $9.99, that's my trigger price, my stop order will fire, and I will sell my shares at a price no lower than $9.90. The biggest risk here is that if the stock suddenly drops to $9.80 or $9.70, I will still be holding shares and I will be losing more and more money because the stock is going down.

The three most popular order types are your limit orders, your market orders, and your stop orders. As you can see there are a number of other order types including trailing stops, but we won't go into those right now. I'll just talk about these three, which are the most popular. All right, I hope this video has been helpful. As usual, any questions, don't hesitate to reach out.

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