Understanding the Basic Types of Trade Orders & 9 Advanced Order Types

By Chika

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Last Updated: December 15, 2021

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As the proliferation of digital technology and the internet continues to democratize the financial markets, a growing number of retail investors are opting to trade and invest by themselves rather than pay commission to advisors and investment professionals to execute trades.

However, this lack of technical know-how has led many new traders to blow up their accounts and stack up losses. 

Before you begin trading stocks, you need to be grounded in certain technicalities. Knowledge of such would equip you with the requisite knowledge to be a better trader and increase your chances of making profitable trades.

One of such technicalities new traders need to understand is the different order types. 

This article covers the basic types of trading orders and how they can complement your trading strategies and investing style.

 

Market Order vs. Limit Order

There are two major types of order - market order and limit order. Let's have a look at them below.

Market order

This is the most basic type of trade. It is an order to execute a trade at the current market price. A market order instructs your broker to buy or sell securities for your account at the next available price.

It remains in effect only for the day, though it is executed almost immediately most times.  

One important thing to remember is that the last traded price is not necessarily the price at which the market order will be executed. Typically because the market is fast-moving and volatile, you will pay a price at or near the posted ask if you are going to buy a stock.

If you are going to sell a stock, then you will receive a price at or near the posted bid. The price will only remain the same if the bid/ask price is exactly at the last traded price

Limit orders

These types of orders are an alternative to market orders and can be particularly useful when market volatility is on the rise. Also referred to as a pending order, a limit order allows investors to buy and sell securities at a certain price in the future. 

A limit order only executes when the price of the security has reached the pre-defined level.

For example, if you want to buy a stock at $10, and its current market price is $13, you could enter a limit order for this amount. This means that only when the price action of the stock retraces to $10, your order gets filled.

As such, a limit order sets the maximum or minimum price at which you are willing to buy or sell.

 

4 Different Types of Limit Orders

1. Buy limit order

This is an order to purchase a security at or below a specified price. For a buy limit order to be effective, you have to place the order at or below the current market bid.

2. Sell Limit

This is an order to sell a security at or above a specified price. For a sell limit order to be effective, it must be placed at or above the current market ask. 

3. Buy Stop

This is an order to buy a security at a price above the current market bid. As a result, they are placed above the market. Once a stop level has been reached, the order will be immediately converted into a market or limit order.

4. Sell Stop

This is an order to sell a security at a price below the current market ask. Like the buy stop, a stop order to sell becomes active only after a specified price level has been reached (known as the stop level). Once a stop level has been reached, the order will be immediately converted into a market or limit order.

 

Stop orders

If you are concerned about fast price action and volatility, there are certain orders you can use to control the level of your exposure and minimize your losses. Stop orders are generally used to protect a profit or to prevent further loss if the price action moves against your anticipated direction. 

However, you would have to confirm if a stop order can be used for the security you are trading as not all securities or trading sessions are eligible for stop orders. Also, under certain market conditions, exchanges and market makers can refuse a stop order.

 

2 Types of stop orders

1. Stop-loss

A stop-loss order is used to minimize losses and exit the trade if the market does not go in your anticipated direction.

Unlike the limit or market orders which become active immediately after they are entered, the stop-loss order remains dormant until the price is reached, then it automatically becomes a market order. Therefore, there is no guarantee that your order will be executed at the stop price.

Eg. if you set a stop-loss sell order at $50 per share, the order would remain inactive until the security price hits or drops below $50. Thereafter the order would then change into a market order, and the shares would be sold at the best available price. 

This is ideal for traders who don't have time to monitor the markets constantly or need downside protection.  

Note: buy stop-loss must be entered at a price that is above the current market price. On the other hand, a sell stop-loss must be entered at a price below the current market price. 

2. Stop limit

This type of order is much similar to a stop-loss order, but rather than changing to a market order, it automatically becomes a limit order when the stop price is reached.

Like any limit order, a stop-limit order may be filled in whole, in part, or not at all, depending on the number of shares available for sale or purchase at the time.

Note: buy stop limit orders must be entered at a price that is above the current market price, while sell stop limit orders must be entered at a price that is below the current market price.

Getting into investing? Read this next: 4 Benefits & 7 Ways to Conduct Due Diligence in Picking Stocks

 

9 Advanced Order Types

There are advanced order types that can be used by experienced traders. However, it is a good idea if beginners become familiar with these concepts and begin practicing them. Doing so would enable them to score more profitable trades. 

1. Trailing Stop Orders

A trailing stop is a modification of the stop order that can be set at a defined percentage or specific amount away from a security's current market price. This type of order is designed to secure profit by allowing a trade to remain open and continue to gain provided the price action moves in the anticipated direction.

The order closes the trade if the direction of the price action changes and moves inverse to the anticipated direction by a specified percentage or dollar amount. 

2. Contingent order

A contingent order is an order that hinges on the fulfillment of another requirement before the order goes live. This type of order only executes when a specific condition has been met. An example of a contingent order is a stop-loss order.

3. One-Triggers-the-Other (OTO)

A One-Triggers-the-Other order creates both a primary and secondary order. If the primary order executes, the secondary order automatically triggers. This type of order can help you save time. Place a buy order as your primary order and a corresponding sell limit, sell stop, or sell trailing stop at the same time.

Or, if you trade options regularly, use an OTO order to leg into a buy-write or covered-call position.

Trailing stop orders are available for either or both legs of the OTO.

4. One-cancels-the-other (OCO)

An OCO order is a pair of conditional orders which is predicated on the fact that if one order executes, then the other order is automatically canceled.

With an OCO order, a trader can place two orders at the same time (usually a limit order and a stop-limit order) but only one of the two can be executed. Experienced traders use OCO orders to hedge risk and protect the downside. 

5. One-Triggers-a-One-Cancels-the-Other (OTOCO)

An OTOCO order combines two or more entry orders - primary and secondary orders which form an OCO order. When the price hits the target, the primary order is executed. This also automatically triggers a placement of the OCO on the secondary orders.

If either of the secondary orders executes, the other is automatically canceled. An OTOCO order helps to automate the trading process and is good for traders who do not have the time to monitor the market constantly. 

6. Fill or Kill (FOK) order

A FOK is a conditional order which requires the order to be filled immediately at its stated price. If this condition cannot be met, or the order is partially filled, then the order would be automatically killed(canceled). This type of order is mostly used by traders who trade in large quantities.

7. Immediate or cancel (IOC) order

An IOC order fills any part of the order it can immediately and then cancels whatever cannot be filled. An IOC order can be useful if the broker does not need the entirety of the order to be filled but rather wants to capitalize on price action. 

8. All or none (AON) order

An AON order is an order that must be filled; otherwise, the order is canceled. AON is usually considered a contingent order because the trader gives instructions to the broker regarding how the order has to be filled. This affects how long the order remains active.

AON orders that cannot be executed at the time of submission remain active during trading hours until they are filled or canceled.

9. A Good-till-canceled (GTC)

A GTC order is a type of order that remains active until either the order is filled or canceled. A GTC order is used when the execution does not need to be immediate, and the trader can wait longer for the entirety of the order to be filled.

Photo by Nataliya Vaitkevich from Pexels

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