Lesson 4 of 8
Estimated time: 22 minutes
Trading Order Types
Master the essential tools for entering and exiting trades at the right price and time
Why Order Types Matter
Order types are your trading tools that determine how, when, and at what price your trades are executed. Understanding different order types is crucial for precise trade execution and effective risk management.
The Foundation of Trade Execution
Think of order types as different ways to communicate with the market. Just like you might ask for something differently depending on the situation, different trading scenarios require different order types to achieve your desired outcome.
Each order type has its own advantages and disadvantages, and the key to successful trading is knowing which order type to use in each situation.
Market Orders
What is a Market Order?
A market order is an instruction to buy or sell immediately at the best available current price. It guarantees execution but not the execution price.
Advantages
- • Immediate execution
- • Guaranteed fill
- • Simple to understand
- • Best for liquid markets
Disadvantages
- • No price control
- • Slippage risk
- • Can be expensive in volatile markets
- • Not suitable for illiquid stocks
Example
You want to buy Apple stock immediately. You place a market order for 100 shares. If Apple is trading at $150.00, your order might fill at $150.05 due to the bid-ask spread and market movement.
Limit Orders
What is a Limit Order?
A limit order sets the maximum price you're willing to pay (for a buy) or the minimum price you're willing to accept (for a sell). It gives you price control but no guarantee of execution.
Buy Limit Order
Set below the current market price. Only executes if the price drops to your limit or lower.
Example: Stock at $100, buy limit at $95
Sell Limit Order
Set above the current market price. Only executes if the price rises to your limit or higher.
Example: Stock at $100, sell limit at $105
Advantages
- • Price control
- • No slippage
- • Good for volatile markets
- • Set and forget
Disadvantages
- • No execution guarantee
- • May miss opportunities
- • Partial fills possible
- • Requires monitoring
When to Use Limit Orders
- • When you have a specific target price
- • In volatile or illiquid markets
- • For large orders that might move the market
- • When you're not in a rush to execute
Stop Orders (Stop Loss)
What is a Stop Order?
A stop order becomes a market order when a specified price (stop price) is reached. It's primarily used to limit losses on existing positions.
Stop Loss (Sell Stop)
Set below current price to limit losses on a long position.
Example: Own stock at $100, set stop loss at $90
Buy Stop
Set above current price to enter on breakouts or cover shorts.
Example: Stock at $100, buy stop at $105 for breakout
Important: Stop Order Risks
- • No guarantee of execution price (slippage)
- • Can trigger on temporary price spikes
- • May not execute in fast-moving markets
- • Gaps can cause execution far from stop price
Stop Limit Orders
Combining Stop and Limit Orders
A stop limit order combines the features of stop and limit orders. When the stop price is reached, it becomes a limit order at your specified limit price.
How It Works
- 1. Set a stop price (trigger)
- 2. Set a limit price (execution price)
- 3. When stop price is hit, limit order is created
- 4. Order only fills at limit price or better
Example
You own a stock at $100. You set a stop limit order with stop price at $90 and limit price at $89. If the stock drops to $90, a limit order to sell at $89 is created. If the stock gaps down to $85, your order won't execute because it's below your $89 limit.
Advanced Order Types
Good Till Canceled (GTC)
Order remains active until filled or manually canceled. Most brokers have a maximum timeframe (usually 90 days).
Best for: Long-term strategies where you're waiting for specific price levels
Day Order
Order is automatically canceled if not filled by the end of the trading day.
Best for: Active trading where you want fresh decisions each day
Fill or Kill (FOK)
Order must be filled immediately and completely, or it's canceled.
Best for: Large orders where partial fills are not acceptable
Immediate or Cancel (IOC)
Fill whatever quantity is available immediately, cancel the rest.
Best for: Getting immediate execution of available shares without waiting
Trailing Stop
Stop loss that automatically adjusts as the price moves in your favor, maintaining a set distance.
Best for: Locking in profits while allowing for continued upside
Bracket Orders
Combines entry order with both profit target and stop loss orders.
Best for: Complete trade management with predefined risk and reward
Order Type Selection Guide
| Situation | Best Order Type | Why |
|---|---|---|
| Need immediate execution | Market Order | Guarantees fill |
| Want specific entry price | Limit Order | Price control |
| Protecting profits/limiting losses | Stop Loss | Risk management |
| Breakout trading | Buy Stop | Enter on momentum |
| Volatile/illiquid stocks | Limit Order | Avoid slippage |
| Trending position management | Trailing Stop | Lock in gains |
Common Order Type Mistakes
Using Market Orders in Volatile Markets
Market orders can result in significant slippage during high volatility periods. Use limit orders instead to control your execution price.
Setting Stop Losses Too Close
Stop losses set too close to the current price can be triggered by normal market noise, causing premature exits from good trades.
Forgetting About GTC Orders
Good Till Canceled orders can execute weeks later when you've forgotten about them. Regularly review and manage open orders.
Not Understanding Order Timing
Different order types have different timing implications. Understanding when each type executes is crucial for effective trade management.
Key Takeaways
- Market orders guarantee execution but not price; limit orders guarantee price but not execution
- Stop losses are essential for risk management but can be triggered by market volatility
- Choose order types based on your trading strategy and market conditions
- Advanced order types like trailing stops and brackets can automate trade management
- Always understand the risks and limitations of each order type before using it
Continue Your Learning Journey
Now that you understand how to execute trades with different order types, it's time to learn how to read and interpret trading charts - the foundation of technical analysis.