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What are the 5 Trading Order Types? | Market, Stop, Limit, Trailing

Every trade needs a buyer and seller, and each must submit an order to buy or sell. Here we explore the main trading order types used in stocks and forex trading.

Contents: Order Types

  • What are trading orders?
  • Difference between an order and a trade
  • What are the four types of order?
  • How to use trading order types

What are trading orders?

Placing an order in trading is the way in which you as a trader send instructions to your broker to buy or sell an instrument on your behalf. In the case of day trading, the order is placed over the internet through a trading platform.

Your instruction to your broker will normally be composed of three things.

  1. Whether you are buying or selling
  2. The size of the trade
  3. The price the trade you be placed at
  4. The time the trade should be placed

 

You can test making orders in the FlowBank Trading platform with a free demo trading account.

An order vs. a trade

Orders are how traders place a trade. A trade in financial markets is like any other trade, when goods or services are exchanged for money. In this case a seller sells their financial instrument to the buyer who pays in cash.

The difference in financial markets is that a trader needs a regulated entity – normally a broker – do the trade on their behalf. So the trader will send the order to the broker to place the trade.

Trading Order Types

With the advent of algorithmic trading, the number of order types is now almost infinite. Sophisticated hedge funds will place orders with tens of inputs, which will be handled by algorithmic market makers at investment banks.

That said, basically there are 4 types of orders that retail day traders will use and that underly more sophisticated orders. The same order types are used in forex markets and stock markets, as well as in short term trading and postion trading.

 

What is an order?

 

1)     Market Order

A market order instructs a broker to buy or sell an instrument at the next available price. There is no specific price set when dealing with a market order but unless there is an absence of liquidity, market orders are usually executed at or very close to the price available when the order was placed.

2)     Limit Order

A limit order instructs a broker to buy or sell an instrument at the specified price or better, however there is not guarantee that the order will be filled. Limit orders enable you to state exactly how much you are willing to buy or sell an instrument for. Traders can set a specific expiry time for a limit order or leave the default setting known as ‘good-til-cancelled’ (GTC), which means it will remain open until executed as a trade.

Buy limit orders mean placing a trade at or below a defined price. Likewise, sell limit orders mean executing a trade at or above a defined price.

3)     Stop Order

A stop order is used to enter the market at a less favourable price. In the case of a buy-stop order, the order is placed above the current market price and in the case of a sell order it is placed below the current market price.

The most common use of stop orders is a stop-loss order. This type of order is often used by traders as a means of risk management, enabling them to limit losses and exit a trade in the event the market moves against them.

Stop losses are free to use and they protect your account against adverse market moves, but please be aware that they cannot guarantee your position every time. If the market becomes suddenly volatile and gaps beyond your stop level (jumps from one price to the next without trading at the levels in between), it’s possible your position could be closed at a worse level than requested. This is known as price slippage.

4)     Stop Limit Order

Investors generally use a stop quote limit order to either limit a loss or protect a gain on a security. A stop quote limit order combines the features of a stop quote order and a limit order.

A sell stop quote limit order is placed at a stop price below the current market price and will trigger if the national best bid quote is at or lower than the specified stop price.

A buy stop quote limit order is placed at a stop price above the current market price and will trigger if the national best offer quote is at or higher than the specified stop price.

Once triggered, a stop quote limit order becomes a limit order (buy or sell, as applicable) at a specified limit price, and execution may not occur as the market price can move away from the specified limit price.

5)     Trailing Stop Order

A trailing stop order is similar to a traditional stop quote order; however, the stop price will adjust with changes to the national best bid or offer for the security. The trail value can be a fixed dollar amount or a percentage. If the calculated stop price is reached, the order will activate and become a market order.

Trailing Stop Quote Limit Order – A trailing stop quote limit order is similar to a traditional stop quote limit order; however, the stop and limit prices will adjust with changes to the national best bid or offer for the security. The trail values can be fixed dollar amounts or percentages. If the calculated stop price is reached, the order will activate and become a limit order using the calculated limit price.

How to use trading order types

In the FlowBank Pro trading platform, the order ticket lists the four types of order available for price entry as Market – Limit – Stop – Stop Limit. It also lists the two order types available to exit the trade: A Take Profit (TP) – or Stop Loss (SL).

 

FB-order ticket - order types

 

The entry orders are done in terms of price – either by typing into the order ticket or using the vertical axis of the price chart. The exit levels can be set using price or points of currency distance away from the entry price.

For example using the above information – an order to buy 10 shares of Tesla could be place with a limit order at $600, a stop-loss at $500 and a take profit order at $1000.

 

Try the different order types in the FlowBank Trading platform with a demo trading account.

 

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