Trading Order Types Strategy - Forex Order Types

Before any trader starts to buy or sell stocks it's important to implement a trading order strategy. And before that traders have to have an understanding of what type of order in which cases to use.

KEY TAKEAWAYS

• Depending on trading style, different types of orders can be used to trade stocks more effectively.
• Orders help traders complement their investing style.
• Market orders executed the most quickly, but they do not guarantee particular execution prices.

Trading Order Types Strategy

A stock order is a set of instructions traders send to a brokerage to buy or sell securities. Below we will introduce to you order types, so that you would be armed and ready to use it in your investing strategy.

Let’s go

Forex Order Types

1. Market order - most simple type of trade; it is an order to buy or sell immediately at the current price. Important thing to remember - the last traded price is not necessarily the price at which the market order will be executed. In volatile markets, the price at which traders execute the trade can differ from the last traded price. The price will remain the same only when the bid/ask price is exactly at the last traded price.

Note: market orders guarantee the order's immediate execution, but do not guarantee a price

2. Limit order - sometimes referred to as a pending order, is a type of order that allows trader to buy or sell a security at a certain price in the future . In a limit order, the trader can set the price, unlike market order, where the trader doesn't have any control over price.

Limit order can be used during high volatility; it helps to control the price at which we buy or sell a security. Limit order is convenient when traders are not actively following the price movement of a stock and want to buy or sell at a predetermined price.

There are 4 types of limit orders:

• Buy Limit - an order to buy a security at a specified price or below. Limit orders must be placed on the correct side of the market to ensure that they get the job done when the price rises. For a limit buy order, this means placing an order at or below the current market price.
• Sell Limit - an order to sell a security at or above a specified price. To ensure an improved price, the order must be placed at or above the current market ask.
• Buy Stop - an order to buy a security at a price above the current market bid. A stop order to buy becomes active only after a specified price level has been reached; known as the stop level. Buy stop orders are placed above the market and sell stop orders placed below the market. Once a stop level has been reached, the order will be immediately converted into a market or limit order.
• Sell Stop - 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.

3. Stop-loss Order - A stop-Loss order is one of the most important types of orders where - trader can limit his losses by exiting a trade if a specific price is reached. When placing a stop-loss order, traders can protect themselves from incurring high losses if the price goes against them.

When a trader places a buy order, he is expecting the price to go up, so that he can earn a profit. But at the same time the price might go down, so to avoid losses the trader places a stop loss order at a price below the buy price.

Example

A trader places a buy order:

Share price = Rs. 200
Stop loss at Rs. 198

Trader expects the share price to go higher, to earn a profit. In case the price falls below Rs. 200, say it falls to Rs. 195.

The trader will book a loss of Rs. 2 per share (200 – 198) and exit the trade.

If he had not put a stop-loss, the loss would have been Rs (200-195) = Rs 5 per share, which is greater than the above scenario.

Similarly, when a trader places a sell order, he expects the price to fall, so that he can earn a profit.

But it may happen that instead of the price going down, the price goes up. So to avoid high losses when prices go down, trader can put a stop-loss at a price higher than the selling price.

If a trader has placed a buy order at Rs. 200, he can place a stop-loss price at Rs. 195.

In case the price goes down, he will book a loss of Rs. 5 per share and exit the trade.

4. Stop-Limit Order - A stop-limit order contains two prices: the stop price, which converts the order into a sell order, and the limit price. Instead of becoming a market sell order, a sell order becomes a limit order that will only execute at the limit price or better. This can mitigate a potential problem with stop loss orders, which can be triggered during a sudden crash when prices fall but subsequently recover.

5. All or None - This type of order is especially important for those buying cheap stocks. An all-or-nothing ordering ensures that the trader will either receive the entire amount of the requested quantity of stock or not receive it at all. This is problematic when the stock is very illiquid or there is a limit on the order.

For example, if you place an order to buy 2,000 ABC shares, but only 1,000 are sold, the all-or-nothing limit means that the trader's order will not be executed until at least 2,000 shares are available at the preferred price. If the trader does not place an all-or-nothing limit, the order for 2,000 shares will be partially filled for 1,000 shares.

6. Immediate or Cancel - any order amount that could be executed in the market in a very short period of time, most often in a few seconds or less, would be filled, then the rest of the order would be canceled. If no shares are traded during this "immediate" interval, the order is completely canceled.

7. Fill or Kill - combination of AON order with IOC specification, the idea behind is - the entire order size to be traded in a very short period of time (a few seconds), if conditions aren’t met order is canceled.

8. Take Profit - sometimes traders call this order profit target. Take profit is always connected to an open position of a pending order and intended to close out the trade at a profit as soon as it has reached a certain level.

9. Day - when trader doesn't specify a time frame of expiry through instructions, order will be set as a day order, in other words at the end of a trading day the order will expire and the trader will have to re-enter the transaction the next day.

10. Good 'Til Canceled - order will stay active until trader decides to cancel it, surely brokerage companies put a time limit on this type of order usually maximum time of order is about 90 days.

11. OCO - a pair of conditional orders specifying that if one order executes, then the other order is automatically canceled. When either the stop or limit price is reached and the order executed, the other order automatically gets canceled. Usually this order is used to soften the risk and to enter the market.

For example, if the stock price is between $ 50 and $ 52, a trader can place an OCO order with a buy stop just above $ 52 and a sell stop just below $ 50. As soon as the price breaks above resistance or below support, the trade is executed and the corresponding stop order is canceled.

And vice versa, if a trader wants to use a correction strategy that involves buying at support and selling at resistance, he can place an OCO order with a buy limit order at $ 50 and a sell limit order at $ 52.

Buy Limit vs. Sell Stop Order

Experienced traders typically use buy and sell orders for their trades, but it doesn’t secure them from slippage. Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. Brokerage companies offer more advanced types of orders that allow specify buy and sell prices in the market, which can help prevent a trader from losing money.

In other words advanced orders eliminate slippage and ensure that trades are executed at the right price if or when the market price is reached. Above we showed different types of orders used in trading, let us show now the key differences between most used: orders buy limit and sell stop order.

• A limit order sets the specified price for the order and executes the trade at that price.
• A buy limit order will be executed at or below the limit price.
• A limit sell order will be executed at the limit price or higher.
• A limit order allows traders to specify a price.
• A stop order includes a specific parameter for triggering a trade. Once the stock price hits the stop price, it will be executed at the next available market price.
• A stop order is usually assigned for margin trading or hedging purposes as it usually has restrictions on how to enter the price.
• Therefore, a buy stop should usually include a price above the current market price, and a sell stop should include a price below the current market price.
• A buy stop order will be executed at the next available market price after the buy stop price parameter is reached.
• A sell stop will be executed at the next available market price after the sell stop is reached.
• Buy stops are usually used to close a short position in a stock, while sell stops are usually used for stop losses.

Bottom Line on Order Types Strategy

Traders have to know the difference between limit and market order. Depending on the situation one or another will be a more suitable approach. Depending on the investment approach, order type can be influenced, as well.

A long-term investor is more likely to choose a market order because the decision is based on fundamental principles that might last for months and years, so the current market price is not an issue.

The trader, however, tends to act in accordance with the short-term trend on the charts and is therefore much more aware of the market price paid; a limit order to buy in with a stop-loss order to sell is usually the bare minimum for setting up a trade.

When traders know what each order does and how each one might affect trading, they can identify which order suits their investment needs, that saves time, more importantly reduces risks and saves money.