April 25
There are 4 order types available on the best trading platforms and brokers. Do you know which order type to utilize in the various market conditions? No? Not to worry!
We will explore the different order types and when they are best used for successful trading. Before we dive right in, bear in mind that there will always be slippage (the difference in the bid and ask prices). The slippage will affect your order and definitely your profit and loss. Hence, it is advisable to trade stocks with a tight slippage.
Eg. The asking price is 100.05 while the chart shows the stock at the 100 level (probably the last transacted price). By entering at the market order, I pay 100.05 instead of 100 and this affects the price I pay and the profits and losses that is to come.
What is it? A market order is the purchase or sale of a stock at the current price made available by your broker.
How does it work? If you are going Long, you pay the asking price. If you are going Short, you pay the bidding price.
When to use it? This is used when you want to trade the stock immediately.
What is it? This order allows you to set the price you would like to enter the trade at.
How does it work? If you are going Long, the price level of the limit order has to be lower than the market price. Eg. The market price for WMT is $118. Your analysis states that $110 makes a better entry, hence you create a buy limit order to purchase shares of WMT when it hits $110.
If you are going Short, the price level of the limit order has to be lower than the market price. Eg. The market price for NKE is $118. Based on your analysis, $120 is the best price to Short NKE. You enter a sell limit order which will Short Sell NKE’s shares when it hits $120.
When to use it? You use it when that is the price you are willing to pay to enter the trade.
Using the WMT example, if you want to go long, $100 is the most you are willing to pay to buy WMT. You do not mind paying less than $100, but you are not willing to pay if WMT is above $100.
Using the NKE example, if you want to go short, $120 is the price you want to short sell for NKE. Any price higher than $120 is good for you (because in short selling, you profit when prices go down) as long as the price goes lower as predicted and does not hit your stoploss. You are not willing to short any price lower than $120 for NKE.
What is it? This can be a regular static stop loss or trailing stop loss. For an explanation on the different approaches to setting a stop loss, visit our article on 4 stop loss approaches to keep your capital intact.
How does it work? You will exit the trade at the price you have set as your stop loss (barring severe market conditions). Eg. You have bought WMT at $100. You have a stop loss order at $95. When WMT turns and reach $95 (excluding severe market conditions), you will sell WMT for $95.
Eg. You Shorted NKE at $120 and have a stop loss placed at $128. Barring any freak market condition, you will buy NKE back at $128.
What is it? This order allows you to execute a trade at a price higher than its market price for going Long.
This same order allows you to execute a trade at a lower price than its market price when you are going Short.
How does it work? The price of AAPL is hovering at $315. You are waiting for it to hit $320 before you buy it. To do so without having to wait in front of your laptop, you can enter a buy stop entry order at $320.
This works for short selling too. If you are looking to short sell FB at $98 but FB is currently trading at $100, you enter a sell stop entry order at $98.
When to use it? This is best used when the stock you are looking at is trending strongly and you are not able to be in front of your laptop.
Understanding how the 4 types of market orders work and when to use them helps you better time your entry and exit, thus adding to your success in trading.
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