Trading Order Types

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Trading Order Types are at multiple levels. Each type has its own conditions, provisions and concerns. In this quick review, let’s understand each of these order types.

Trading Order is a set of instructions given to the stockbroker regarding the buying and selling of securities. They tell the brokers when to enter or exit the trade positions in the market on the trader’s behalf.

Trading an order can simply be an order to buy or sell, but such a straightforward order becomes quite inefficient and risky due to the market conditions and volatility.

Therefore, there are multiple trading order types which affect the outcome of the trade. Order types vary in terms of being conditional or unconditional.

Trading Order Types Explained

Certain trading order types get executed without any condition to be fulfilled, immediately; whereas there are others that get executed only when certain conditions with respect to the price of the security or the time frame are met.

Trading order types play a very critical role in the success or failure of the trade, so it is very important for a trader to understand the benefits and drawbacks of the order types before making a decision on which one to choose.

There are various trading order types which differ in their purpose, outcome and limitations. Some of them are as follows:

Market Order

It is one of the most basic trading order types and it gives the instructions to the broker to buy or sell the securities at the current best available price immediately. Time is of the essence here. It is an unrestricted trading order type, which is not conditional upon any specific price or time frame for being executed.

The market order gets filled immediately, at the best available price.

For example, when the broker is instructed to buy 100 shares of IBM, the order will be taken as a market order and the broker will buy 100 shares of the said company at whatever price the shares are trading at that very instant.

In volatile markets, market orders may turn out to be quite risky as there is no price limit and due to the time lag between placing the order and execution of the order, the price at which the securities are actually bought or sold may be quite different from what was expected and it may lead to unexpected losses.

However, the need for placing market orders arises when the trader needs a sure-shot entry or exit from the market, which may not be possible with other order types. Market order ensures that the trade gets filled definitely, so the trader is able to enter an erratic market or exit from a badly stuck position.

Although a trader needs to be very careful and cautious while placing a market order as there can be losses due to slippage and other factors. It is not advisable to place market orders while trading in volatile markets like intraday trading.

Limit Order

It is one of the safest trading order types, as it gives specific instructions to the broker to buy or sell the securities only at a specific price or better. A limit order gets executed only when that specific price is reached.

For example, a trader wants to buy the shares of IBM only at Rs 160 or lower. In that case, he will place a limit order with buy limit price as Rs 160 and the order will be executed only when the price of IBM share is at Rs 160 or lower than that.

Limit Order is considered to be one of the most optimum order types, especially when trading in volatile markets like intraday trading. It is used to control risks to a large extent and also help the trader to capture the target buying or selling price. Securities can be bought at the lowest price and sold at the highest price.

However, the limit order also has the limitation that it may not get filled at all if the market does not reach the specified price. So, limit orders must be used as a mechanism or technique to avoid huge risks and unprecedented losses, when the price at which entry or exit from the market is made holds importance.

Based on the conditions attached to it, the limit order can be of the following types:

  1. All or none order: It is a type of limit order which instructs that all shares will be bought or sold at the same time if the trade is to be executed. The trade will be executed only if the full quantity of shares are available to be executed.
  2. Fill or Kill order: This type of limit orders states that the order must be immediately executed or cancelled.
  3. Limit on open order: Securities will be bought or sold at whatever the opening price of the market is but within a predetermined limit price.
  4. Limit on close order: Securities are bought or sold at the closing price of the market, but with a limit price.
  5. One cancels the other order: It is limit order in which the only one of the two orders is executed, whichever meets the mentioned parameters first and the other is automatically cancelled.

Stop Order

It is one of the trading order types which remains dormant till a particular price is reached and it becomes active only after that specific price. The purpose of stop orders is to limit the risks and protect the profits by closing the trade automatically when the price reaches a specific level.

A buy stop order is placed above the current market price and a sell stop order is placed below the current market price. When the stop price is reached, the stop order becomes a market order or a limit order and it gets executed.

Depending on whether the shop order converts into a market order or limit order, stop orders are of two types:

Stop loss Order

The stop-loss order, whether buy or sell becomes a market order as soon as the target price is reached. At this price, the trade gets executed immediately, but the price may or may not be close to the stop price, as the market is highly volatile and the stop price may not be immediately captured.

For instance, when a trader is holding a share at ₹100 and is worried that the price of the security may fall, he places a sell stop order at ₹80 and if the price drops down to ₹80, the security will be automatically sold at the nearest available price. This helps to limit the losses and protect the gains.

Stop Limit Order

This order type is the combination of a stop order and a limit order. When the stop price is reached, the order becomes a limit order and instead of getting executed immediately, it gets executed at the specified limit price or better.

So, a stop limit order may not get executed at all if the market does not reach the specified limit price.

Trailing Stop Order

This is also one of the important trading order types, wherein the stop parameter is a moving or trailing price. A specific stop price is not mentioned instead, the stop parameter is mentioned which is mostly a percentage change in the price of the security. The stop price keeps getting reset according to the security’s performance.

For example, a trader buys the shares of IBM at ₹160 and places a trailing sell stop order of ₹16 which is 10% of the current price. So, the sale will be triggered as soon as the price reaches ₹144.

However, if that low is not reached, the sale will not happen. The price of IBM shares then reaches a high of ₹180 instead of going down so in this case, the stop price will automatically change to ₹162, which is 10% trailing stop loss of the high.

Just like the stop orders, trailing stop orders may get converted to market orders or limit orders. When the trailing stop order gets converted to a limit order, it is called trailing stop-limit order and gets executed only at a specific price.

Thus, many trading order types are available to choose from and they may be confusing and putting the wrong order type may lead to losses, however, with time and practice a trader becomes efficient to decide on which order types are suitable for him and his trades.

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