Types of Orders

When you trade, you give your broker an ‘order’ to buy or sell the shares. You have choices on how you present that order, and that will influence how the broker fulfils it. This is covered in detail in one of the course modules about money management, but at this stage you should know that you have choices.

For instance, you can tell the broker to buy or sell the shares immediately, regardless of the price, and hope that the price will be similar to what you have been looking at on your screen. Usually it won’t be very different, and often a good broker can improve on the price when he places the order.

On the other hand, you can place an order and say that you don’t want to pay more than a certain price, and the broker will either get the shares at that price or better, or he won’t fulfill the order. You can do the same type of thing when selling.

A very common type of order when you are trading is called the ‘stop loss’ order. You can either tell your broker, or you can watch the prices yourself, but either way the stop loss is valuable protection for your account. The idea is that, if your trade goes the wrong way, say falling in value rather than increasing, the stoploss order tells your broker to sell your shares at a lower price before they drop any further. That way you prevent any more losses to your account even if you are not watching the market.

Choosing Your Order Type

  • Market Order – This is the simplest and one of the most commonly used. If you wish to buy or sell, you just take whatever quote that appears on your screen – and click. This price is the market at the time.
  • Limit Order – Let’s say you are in a trade and believe the market will reach your target price. Say you have a target of 12,250 on the Dow and you are long. The market is trading at 12,126. You would then place a Limit Order to sell at 12,250. If the market does reach your target, your order becomes live and you offer to sell at 12,250. Because the Dow is a very liquid market, you will almost certainly get your price, especially if the market trades through your target. Of course, the danger is if the Dow does not trade up to your target and falls back.

There are two types of Limit Order:

  1. GTC Good Till Cancelled.  This order stays on your firm’s system until you decide to cancel it.
  2. Day Only. This order expires at the end of the trading day, unless filled or you close out the trade beforehand.
  • Stop Order – This is an order I want you to become very familiar with. It can get you into some remarkable trades, it can take you out of a very profitable trade before your ‘paper’ profits disappear, and it can get you out early of a wrong ‘un in case your analysis deviated somewhat from reality! The stop order is your bread and butter in your trading hamper. I want you to get into the habit of ALWAYS using protective stop orders when in a trade.

I know some experienced traders never use stops to protect their positions. To me, they are like soldiers going into battle without a flak jacket. It is possible to survive, but don’t bet on it!

You then have a decision to make! Usually, the best policy is to move your protect-profit stop up just in case the market plunges and you “lose” your paper profits. More on this when we discuss strategy.

Sorry to bring this up just as you were getting comfortable, but I must tell you that there are several different order types you can use to enter and exit a market. I will briefly describe the main ones below. But, since I advocate simplicity in all things, I will recommend you use only these.

There are a number of other types of order, and you need to become familiar with the ones that apply to your method of trading. They help you manage your money and control your account, so they are discussed later in the money management module.

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