Know Your Order Types

There are myriad of different order types used by brokers. Thankfully they are common to most brokers and across all asset types.

To become a trader in the digital world you will need to become familiar with most of them. This page identifies many of the order types you are likely to encounter and the advantages and disadvantages of each.

Many terms used on this page are referenced in our Trading Glossary.

Market Order vs Limit Order

All order types can be placed into these two categories.

1. Market Order

This is the simplest of order types. A trader will place a market order when they want to buy or sell an asset immediately at the current price. If the trader is buying an asset they will have their order executed at or near to the ask price. If the trader is selling an asset they will have their order executed at or near the bid price.

A market order does not guarantee a price. It only guarantees execution.

Advantages

• You are guaranteed execution.
• Generally the cheapest form of execution type (for commission based brokers)

Disadvantages

• You are not in absolute control of the price your trade is executed at.

2. Limit Order

A limit order is like a conditional trade. A trader will place a limit order when they want to buy or sell an asset but only before a certain price point is reached.

For example, if you wanted to buy XYZ stock at $15, you could enter a limit order for this price. This means that you would never pay more than $15 for XYZ stock, but it is possible that you could buy it for less.

A trader can also specify how long they want the limit order to remain active. By default, this is usually set to “Good till cancelled”. This means the limit order will remain active until it has been executed, or you have cancelled it.

Advantages

• The price you buy or sell at will never be worse than the price specified in your limit order.
• You can specify how long you want the limit order to exist for.

Disadvantages

• You are not guaranteed execution (as your limit may never be reached)
• You may only be able to buy or sell part of your order. (see Fill or Kill if this is an issue)
• May incur additional costs (for commission based brokers)

Stop Orders and Limit Orders

There are four main types of stop and limit orders.

The two types of limit order will execute at, or better than, the specified price. You will use limit orders when you want to execute a trade if the price moves for you. The price associated to a limit order is always more favourable than the current market price.

The two types of stop order will execute at, or worse than, the specified price. You will use stop orders when you want to execute a trade if the price moves against you. The price associated to a stop order is always less favourable than the current market price.

1. Buy Limit Order

A trader will place a buy limit order when they want to buy an asset at or below a specified price.

A buy limit order must specify a price at or below the current bid price.

2. Sell Limit Order

A trader will place a sell limit order when they want to sell an asset at or above a specified price.

A sell limit order must specify a price at or above the current ask price.

3. Buy Stop Order

A trader will place a buy stop order when they want to buy an asset at or above a specified price.

A buy stop order must specify a price at or above the current bid price.

4. Sell Stop Order

A trader will place a sell stop order when they want to sell an asset at or below a specified price.

A sell stop order must specify a price at or below the current ask price.

Stop Orders vs Limit Orders

We have introduced a lot of order types already but need to identify when you should use a limit order instead of a stop order. Here are a few examples

1. Buy Limit vs Buy Stop

A trader would place a Buy Limit order when they want to:

• open a long position below the current price
  • For example, XYZ stock is currently priced at $10.50 and the trader wants to open a long position by purchasing 100 shares if the price drops to $10. They would place a buy limit order for 100 shares of XYZ stock at $10.
• or, close a short position below the current price
  • For example, XYZ stock is currently priced at £10.50 and the trader wants to close their short position of 100 shares if the price drops to £10. They would place a buy limit order for 100 shares of XYZ stock at £10.

A trader would place a Buy Stop order when they want to:

• open a long position above the current price
  • For example, XYZ stock is currently priced at $10.50 and the trader wants to open a long position by purchasing 100 shares if the price rises above $11. They would place a buy stop order for 100 shares of XYZ stock at $11.
• or, close a short position above the current price
  • For example, XYZ stock is currently priced at £10.50 and the trader wants to close their short position of 100 shares if the price rises above £11. They would place a buy stop order for 100 shares of XYZ stock at £11.

2. Sell Limit vs Sell Stop

A trader would place a Sell Limit order when they want to:

• close a long position above the current price
  • For example, XYZ stock is currently priced at $10.50 and the trader wants to close a long position by selling their 100 shares if the price rises above $11. They would place a sell limit order for 100 shares of XYZ stock at $11.
• or, open a short position above the current price
  • For example, XYZ stock is currently priced at £10.50 and the trader wants to open a short position by selling 100 shares if the price rises above £11. They would place a sell limit order for 100 shares of XYZ stock at £11.

A trader would place a Sell Stop order when they want to:

• close a long position below the current price
  • For example, XYZ stock is currently priced at $10.50 and the trader wants to close a long position by selling their 100 shares if the price drops to $10. They would place a sell stop order for 100 shares of XYZ stock at $10.
• or, open a short position below the current price
  • For example, XYZ stock is currently priced at £10.50 and the trader wants to open a short position by selling 100 shares if the price drops to £10. They would place a sell stop order for 100 shares of XYZ stock at £10.

Stop Loss Orders and Stop Limit Orders

We have already covered Stop Orders and Limit Orders. How do Stop Loss Orders and Stop Limit Orders differ?

1. Stop Loss Order

This is perhaps the most well know of all order types and one that you must be familiar with to succeed as a trader.

A stop loss order is your worst case scenario and once triggered your trade will generate a loss.

A trader will place a stop loss order when they want to:

• close a long position below the current price
• close a short position above the current price

Advantages

• Once the stop loss price is reached you are guaranteed execution

Disadvantages

• Once the stop loss price is reached you are not in absolute control of the price your trade is executed at.

2. Trailing Stop Loss Order

These are essentially the same as stop loss orders but the stop loss price is variable.

A trader will place a trailing stop loss order when they want to:

• close a long position below the current price but increase the stop loss level as price increases.
• close a short position above the current price but decrease the stop loss level as price decreases.

For example, a trader has bought 100 shares of XYZ stock at £10. They set their initial stop loss at £9.50 and also specify that it should be trailing.

• If the price falls immediately to £9.50 their initial stop loss order will execute at £9.50.
• If the price were to rise to £11, their stop loss will automatically increase to £10.50. The price then drops to £10.50 at which point the stop loss order will execute at £10.50.

This method is used to lock in profits, or reduce losses, when the price improves. If the trailing level is too close then a trader risks the position being closed prematurely due to natural market volatility.

3. Stop Limit Order

These are similar to stop loss orders but they have an additional limit price. The stop limit order consists of a trigger price, which activates the order, followed by a limit order, which executes the order.

A trader will place a stop limit order when they want to:

• close a long position below the current price, but with a lower limit
• close a short position above the current price, but with an upper limit

Advantages

• Once the stop loss price is reached your trade will only be closed within your specified price range.

Disadvantages

• Once the stop loss price is reached you may not close your entire position. The price may pass through your limit and therefore remain open.

4. Trailing Stop Limit Order

These are essentially the same as stop limit orders but the stop limit price and trigger price are variable.

A trader will place a trailing stop limit order when they want to:

• close a long position below the current price, but with a lower limit and to increase the stop limit level as price increases.
• close a short position above the current price but with an upper limit and to decrease the stop limit level as price decreases.

For example, a trader has bought 100 shares of XYZ stock at £10. They set their initial stop loss at £9.50 with a stop limit of £9.25 and also specify that it should be trailing.

• If the price falls immediately to £9.50 their initial stop loss order will trigger at £9.50. The trade should be closed at a price between £9.50 and £9.25.
• If the price were to rise to £11, their stop loss will automatically increase to £10.50 and stop limit to £10.25. The price then drops to £10.50 at which point the stop loss order will trigger. The trade should be closed at a price between £10.50 and £10.25.

This method is used to lock in profits, or reduce losses, when the price improves. If the trailing level is too close then a trader risks the position being closed prematurely due to natural market volatility.

Stop Loss Order vs Stop Limit Order

1. Stop Loss vs Stop Limit

These order types are both designed to close a position at a price less favourable than the current price. They are therefore used to limit losses and will form a major factor in your risk management strategy.

If you use a stop loss order you are guaranteed that your position will close once the price is reached. You can not be certain of the price your trade executes at though because the market may move past your stop loss level before the trade is executed.

If you use a stop limit order your position is not guaranteed to close but you can be sure that if it does it will be within a specified range. Your position may not close because the market could move through your limit price before the trade is executed.

2. Trailing Stop Loss Order vs Trailing Stop Limit Order

The same advantages and disadvantages apply here as they do for stop loss orders vs stop limit orders.

Other Order Type Terminology

There are some other terms and clauses that you may come across whilst trading.

• All or None Order
  • This is a type of order that guarantees a specific quantity, at a specified a price, within a given time frame. For example, I want to buy 100 shares of XYZ Stock at £10, today (All or None)
  • The order will only be completed if the broker can purchase all 100 shares at a price of £10 today. If the broker cannot purchase all 100 shares at the required price today then the transaction will be cancelled.
• Immediate or Cancel Order
  • These are market orders that only specify a quantity. For example, I want to buy 100 shares of XYZ Stock (Immediate or Cancel).
  • This type of order will typically only allow execution for a few seconds and may result in a partial fill. For example the broker could only purchase 75 shares of XYZ stock. The order for the remaining 25 shares will be cancelled.
• Fill or Kill Order
  • This is a combination of an All or None order with an Immediate or Cancel order. For example, I want to buy 100 shares of XYZ Stock (Fill or Kill)
  • The transaction will only complete if the broker can purchase all 100 shares immediately. If the broker cannot purchase all 100 shares the transaction will be cancelled, as will the order.
• Good Til Cancelled Order
  • This is the default type of order. It states that an order will remain active until it has been filled, or until it is cancelled.
• Day Order
  • This specifies a time constraint on an order. It states that the order must be executed today otherwise the order should be cancelled. The term day will apply to the trading session for that day, as not all markets trade 24 hours.
• Take Profit Order
  • Many brokers use take profit orders to determine the price level at which a profit should be taken from a position. They must be set at a price more favourable to the current price.
  • For short trades they are simply buy limit orders
  • For long trades they are simply sell limit orders
• One Cancels Other Order
  • When you open a position and specify a stop loss order as well as a take profit order then you are creating a one cancels other order.
  • If the stop loss order executes then the take profit order would be cancelled.
  • If the take profit order executes then the stop loss order would be cancelled.

Summary

This is a very detailed subject but hopefully by the time you reach here you should have a much clearer view of the different order types. More importantly, you should know when they should or should not be used.

You should identify which order types you want to use as part of your trading strategy. As always this should be documented in your trading journal and will form part of your position sizing strategy.