Common Order Types Used In Stock Trading and How to Use Them

When I first started trading, I was unclear about the basics that needed to be understood. This was due to the conflicting and controversial information available on the subject. Being successful in trading requires full understanding of the basics about stock trading. Neglecting essential information surrounding a trade can cost you money.

In this post, I would like to inform you about the different types of orders you can place on the stock you choose. Let us dive in!

Market Order

A market order is the most basic type of an order. When executed, you buy or sell a quantity of stock at the best possible price that can be offered. Note that this type of an order only guarantees execution. Price ,at which, this order gets executed varies due factors which cause slippage in the price. This order is usually used when you are keen to enter or exit a trade at that moment in time. Market orders should be used when there is a good amount of liquidity in the market. Using this order in pre-market or post market hours is not a good idea due to greater chances of slippage in the price.

Limit Order

Another type of order you might come across is the limit order. A limit order does not guarantee execution of the order, but it ensures that the price you get is the price you want for the chosen stock. This order can be executed for both long and short positions. The limit order tells the broker to buy or sell a certain quantity of stock when a threshold in the price is crossed. The limit order only is filled if the price you entered is reached. This type of an order is usually used to ensure that a buying opportunity is not lost. For e.g. in fast moving markets, the price is often very volatile. Correct execution using the limit order can save you from the hassle of continuously monitoring the price in the market. A Limit order to buy should be entered at the market price or lower. A limit sell order should be placed at market or more than the market price.

Stop-loss/Stop order

A stop loss order is used to contain the losses that can be incurred on a trade. Good traders always use and recommend the usage of a stop loss order. This order is similar to the limit order but works in the opposite. It nullifies a long or a short position when a particular price is reached, registering any losses or profits in your account. Many traders use this order as a means to secure their capital from large losses.

A Trailing Stop

A trailing stop is essentially the same as the stop-loss order, but its difference lies in the fact that it moves with the market price. Depending on the direction the price of a stock moves, a trailing stop goes up or down with it. It only closes the trade in an opposite direction to your position. A trader defines a set percentage or a fixed amount by which the price should fall or rise to close the trade.

A Day order

A day order is a simple order that expires at the end of the daily regular trading session. Many trading software use this as the default order type in them.

Good-Til-Canceled GTC

A good-til-cancelled order is a common type of order, which can only removed if the trade is filled or the trader wishes to cancel the order.

Good-Til-Date GTD

This order only stays active until a specified date.

Immediate-Or-Cancel IOC

This order requires the partial or complete filling of the order or it will be canceled

Minute Order

This order only remains active for a specified number of minutes

Other than the above, there are many order types but they either are advanced or are not very common. I will discuss some of these in the next post I write.

Happy Trading!