Order Types

There are many different types of trading orders, sometimes depending on the type of security you are trading, and although some brokers will not have them all, they should have the most frequently used ones. You will probably find yourself using just three or four types most of the time.

If you place your order by telephone to your broker, it’s quite likely that they will record the conversation in case of any disputes later. It’s best if you ask the broker to repeat the order back to you so you can make sure that they heard it right.

Mostly you will be placing your orders online, and it’s important to double check before the confirming mouse click. Increasingly, these orders are automatically placed by computer at the broker’s office, but there may be office staff involved. Either way, you’ll get a confirmation when the order has gone through, and this usually comes by e-mail.

Market Order

The market order simply tells your broker to buy or sell at the current price. If you want to place a trade quickly, this is the easy one to use, but there’s no guarantee that the order will be at the price you expect. You can be certain, however, that the order will be placed, or ‘filled’, as long as your account has money to cover it.

Limit Order

The limit order sets a limit on the price that you will buy or sell at. With the buy limit order you state the maximum you want to pay, usually just below the current price, and if/when the market price hits that level the broker will fill the order, provided the price stays there for long enough. You are guaranteed that you won’t pay more than you specify, but there’s no guarantee that the order will ever be filled, as that is subject to the price coming down.

The sell limit order is similar, and placed over the current market price. The limit price is the least amount you want to accept. If your shares are sold, you will get at least the price you asked for them, but if the price never goes up to that they will not be sold.

Stop Order

There are several types and uses of stop orders. One of the most familiar to traders is the stop loss order which we’ve talked about before. When you place a long position, you also place a stop order just under the entry price. If the price drops back to this level, the stop order becomes a market order to sell, which limits your loss in the event that the trade seems to be failing. Note that the price at which it’s sold is not guaranteed, and in a fast-moving market could be lower than the level you set.

The way around that is to place a Guaranteed Stop Loss order, which is available from a few brokers in some markets, such as contracts for difference. In this, you name it the price that you want receive if the stop loss is hit, and the broker will honor it even if he cannot sell quickly enough to receive that amount. Generally the guaranteed stop is considered a waste, because you pay a premium when you place the order — effectively an insurance premium — and this is lost if the trade goes the right way. The only time the guaranteed stop may be worthwhile is when you expect a sudden change in price that would make the stop loss order settle at a much lower level.

Another use of the stop order is to take up a new position in the market. The buy stop order will become a market order to buy if the price rises to a certain level. You might use this for example to capture a breakout. You would set the level above the resistance so the order would not take place unless a breakout had started. While it seems strange to wait for the price to rise before buying, this ensures that you don’t waste time and money taking up a position that goes nowhere.

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