Orders in trading: what are they?
Knowledge of order types in stock and crypto trading is a must for every investor. Setting inputs and outputs efficiently is indeed one of the pillars of success.
However, orders in trading adopt similar names that can be confusing for the less experienced. A mistake due to lack of awareness could cost a lot of money; such a situation should therefore be avoided at all costs.
In this article, we will describe the main types of stock market orders. They can also be found when trading cryptocurrencies, derivatives and commodities. Therefore, once we understand them we will be set for life.
It should be noted, however, that different trading brokers, whether crypto exchanges (such as Binance and Bybit) or traditional ones, often employ different terminologies and/or offer particular orders. In this in-depth study, we will therefore try to study the universal ones.
The subject may seem complex, but it is not. Orders in trading always have the objective of buying or selling an asset. What changes is the mode and everything that goes with it (price, timing, size, etc.).
In a few minutes, everything will be much clearer. Let’s start with the simplest trading order: the market order.
Index
Market Order trading
Let’s start with the basics with the Market Order.
As the name suggests, this is a buy or sell order executed immediately and at the market price.
By placing a market order, no limits of any kind are set. In effect, it is as if we were saying ‘I want to buy ABC shares now, here are my XXX euros “ or ”I want to sell my ABC shares now and in quantity XXX’.
We must bear in mind that there is no guarantee that we will buy or sell at the last displayed price, especially if we are dealing with a volatile asset. The market order only gives the certainty of completing the order; if then the buy or sell price should be different to what we thought, well, that’s just our problem.
This type of trading order is perfect for entering or exiting without delay. It is ideal for those who want to trade at that precise moment, all other considerations aside.
It often happens that the market order is abused by neophytes. This is due to a lack of knowledge of technical analysis and order types. In particular situations one can get hurt because one positions oneself casually, without assessing the market phase.
The professional trader uses the market order more carefully, setting the action with the correct timing.
Even for non-professionals, it would be best to study the basics of trading so that they can steer clear of avoidable losses. So here is the first episode of the Conscious Trading Course; if you like it, you can find all the episodes on the site, totally free of charge and without having to subscribe.
Limit Order trading
With the term Limit Order we identify a different and more complicated category of orders than the simple market order.
The limit order has a price level (hence the term limit) which triggers the order. As long as the indicated figure is not reached, the order remains pending.
We can identify four limit orders. Let us list them and discover them one by one.
- Buy Limit order: purchase of an asset at or below a certain price. The trader then indicates the maximum he is willing to spend. Example: bitcoin at a market price of $30,000; a Buy Limit at $25,000 would not be triggered until this price is reached. Great for buying cryptocurrencies (or anything else) if you want to take advantage of a possible drop.
- Sell Limit order: Exact opposite of the previous point. The trader sets a minimum sell price, below which he is not willing to sell the asset. Example: bitcoin at a market price of $25,000; a Sell Limit at 30,000 would only start selling at a market price >= $30,000.
- Buy Stop Order: buying an asset at a certain price, above the current market price. Example: bitcoin traded at $30,000 in the market; a Buy Stop at 32,000 would start buying bitcoin when this price is reached. Suitable in strong bullish trend situations where you still want to increase your position.
- Sell Stop Order: The opposite of a Buy Stop. This is an order to sell at a price below the current price. Example: bitcoin traded at $30,000; a Sell Stop set at $25,000 would sell from this figure down.
Limit orders help the trader in his trading. If set after careful study, they can make the difference between victory and defeat.
On the subject of losses, let us turn to stop losses, which are fundamental to proper risk management in trading.
"Limit orders are triggered when a certain level is reached"
Stop Loss Trading
We mention it often and here we are talking about it again: the stop loss.
Without mincing words, this type of order in trading is fundamental. We know how bad it is to get an analysis wrong and see the market go in the opposite direction. The temptation to stay positioned to recover is always strong, but let’s be reasonable:
- We do not know when the market will move as we had thought.
- Above all, we don’t know if it will ever go where we imagined.
- Capital cannot remain at the mercy of events.
If taken into account and calculated, a loss is part of the game. The stop loss is here to help us.
This type of order also has its own limit. However, there is an important difference from limit orders: while the latter are immediately active, waiting to complete, the stop loss is not. It is there, slumbering but ready to awaken as soon as the alarm clock goes off.
The stop loss can be either buy or sell. The names usually used are Stop Sell and Stop Buy.
The former is used when going long on an asset. By buying Apple shares convinced that they will go up, a stop loss placed near a key support would give us all the protection we need if we were wrong.
The buy stop loss, on the other hand, is used in short trading. In a short sale of Tesla shares motivated by the thought of an imminent fall, if they continue to rise, the stop loss could buy them and reduce losses.
"The stop loss liquidates the position and limits losses in case of defeat"
Stop Limit Order trading
Here is a close relative of the stop loss: the stop limit order.
The name stop limit order should ring a bell. Basically, these are stop loss orders, but with two different prices:
- Stop price, the trigger that makes the stop limit order go from dormant to active.
- Limit price, a minimum buy or sell threshold that acts according to the dynamics of the limit orders seen above.
Whether simple or with limit, the advice is to always use the stop loss.
There would be no point in continuing to see the investment go into the red: our analysis would be invalidated, we accept this and save the remaining capital.
Caution: to protect ourselves from losses, it is always better to opt for a simple stop loss. Limit orders may in fact not completely close the position in the event of a crash, precisely because of the minimum thresholds. This would lead to ‘keeping on the back’ an asset that should instead be liquidated.
"Never give up the stop loss: it can save us from far worse losses!"
Take Profit Trading
After the tools for containing losses, let us turn to something more pleasant: the take profit.
Those who master English have already understood what we are talking about. Translated into ‘ take profit’, the take profit does just that: it closes all or part of the position and safes the profit made.
For example, if we had bought Amazon shares at $100 each convinced of a potential climb to $120, a take profit placed right there might do the trick.
Of course, then trading is continuous metamorphosis and we might reconsider the target price upwards (or downwards). The take profit can easily be eliminated or modified to match the changes, as can following the trend.
Furthermore, a take profit can also only cover part of the position, leaving another portion active. Indeed, this feature also applies to stop losses.
Let us use the take profit and not get too enticed by promises of monstrous gains. We carefully analyse the asset, the trend, resistances, volumes and so on. Let’s identify a target and then protect any gain: there is nothing worse than seeing a profit fade and even closing at a loss!
"The take profit secures the profits made in a trade"
Other trading orders
We have listed all the main types of orders in trading. There remain other more or less imaginative ones, which are not so common among retail brokers.
Let’s have a look anyway out of pure thirst for knowledge; should we then come across one of these orders, we will already know what it is.
In Immediate or Cancel, the trader wants the order to be completed within a certain time frame, usually reduced to a few seconds. It can be either market or limit. The order is cancelled if the time condition is not met.
All or None is usually employed by those who trade on shares with a low price, below $5 each. The order is placed on generally large quantities and is only completed if the bid is able to fill it completely. For example, if we wanted 5,000 shares of the company ABC, an All or None would not be executed under that number.
Finally the Fill or Kill. We take the Immediate or Cancel and merge it with the All or None and we have the Fill or Kill. This is an order that requires a reduced time interval to be completed, combined with the condition of filling the entire quantity.
We could go on but this is not really the case, there is already so much to understand and memorise.
This article can be of support whenever there is some confusion to dispel, especially for those new to the world of trading.
We repeat that the various platforms not infrequently adopt slightly different names; the substance, however, does not change.
The journey has just begun: if you wish, check out all our articles on the basics of trading and continue with the next levels.
Happy reading!
