Order Types – Introduction
One can place orders to buy/sell in multiple ways and multiple options available tend to confuse new traders. It is important to know different order types to execute the trade in the best possible manner.
Order types directly impact your trading strategy, risk management, and overall success. Most common order types are listed below:
Market Order
It gets executed immediately at whatever available current market price. So, there is no price guarantee where the order would get executed.
Eg If the current price is 100, and you place a market order, it may be executed at higher or lower than 100.
It should be used only where the asset is liquid.
- Use: Quick execution especially when your stoploss is hit.
- Risk: Price may change rapidly in volatile markets and in illiquid assets, there is a huge difference between buy and sell order (spread) which may lead to slippage.
Limit Order
In limit order, you specify the price at which order gets executed.
If stock is trading at 100 and you place a buy order at 98, it will only get executed at 98 or less than 98 (better price). Buy order should be less than current market rate, if the buyer order is more than 100, say 101, it will get executed immediately at whatever market price available less than 101.
In the above buy trade, if your target is 120, you can place a limit sell order at 120 which gets executed when price reaches the level.
The opposite is true if you are entering a short trade.
- Use: your order gets executed at a predefined level or at a better price. This can also be used to set targets of a trade.
- Risk: May not be executed if the market doesn’t reach the specified price.
Stop Order (Stop Loss Order)
This type of order gets converted into a market order when a specified price is reached.
If you bought a stock at 100 and want to keep a stoploss at 95, you have to place a Sell Stop Order and when the price reaches 95, your sell order gets executed at market price..
- Use: This is used to get out of a trade at a predefined price level.
- Risk: Can lead to slippage as it executes as a market order.
Stop-Limit Order
This is a combination of order type 3 and 2. It is used to stop out of a trade but at a specific price. When your stop price is reached, this gets converted into a limit order.
In such orders, you’ll have to select two prices – trigger (where order gets activated) and limit price (where order gets placed).
If you have bought a stock at 100 and want SL at 98; for sell stop limit order, your trigger price can be 99 (where your order gets activated) with limit price at 98 where the order would get executed.
- Use: To control the price at which the order is executed.
- Risk: This has a higher chance of not getting executed due to adverse price movements.
Trailing Stop Order
This order is used to trail the stop loss when price moves in our favor by a fixed amount or percentage.
Eg current price is 100 and SL is at 95 (5 points). Price moves to 105, SL gets shifted to 100.
- Use: This lets lock in profits as price moves in a favorable direction.
- Risk: May not work well in volatile markets.
Good Till Cancelled (GTC) Order
Such orders generally remain open up to 1 year until executed or canceled manually.
- Use: Generally used for investing purposes.
- Risk: Requires monitoring.
Day Order
Expires if not executed by the end of the trading day.
- Use: For traders focusing on intraday opportunities.
- Risk: Need to place again next day if it remains unexecuted.
Bracket Order
Such orders require you to punch entry, target, and stop-loss orders in one package.
- Use: For automating trade management.
- Risk: not suitable for volatile markets
