Do you know what kind of trading orders exists, when and how to use them? A basic component of trading is learning how to execute the right orders and knowing what role each one plays in your success. In this post we will see the three basic types of orders that a trader can place when buying or selling:
The most common orders are:
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Market orders: orders that are submitted without a buy or sell price.
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Limit orders: used when you want to secure a maximum (buy) or minimum (sell) execution price.
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Stop-Loss orders: intended to limit losses by closing the trade once the predetermined price has been reached.
Before executing an order, it’s important to analyze a security’s Bid-Ask Spread to determine its liquidity and risk. These terms are fundamental to trades: the price at which a security is currently being sold is called the Ask price. The highest price anyone is willing to pay for security is known as the Bid price. The difference between the Ask and Bid prices is the Spread.
The spread’s value is in pips or “percentage in point” which is 1/100 of 1% – or one basis point. Companies with low trading volumes tend to have wider spreads due to less liquidity. On the other hand, companies with high trading volumes will have smaller Spreads due to higher competition. The risk with wider spreads is that if you have to suddenly sell a security, a loss could be incurred.
Now that you have a better understanding of how to determine a security’s liquidity as well as immediate risk, we can look at the three most common orders a trader can place.
Market Orders allow you to buy or sell at the next available price and are typically executed immediately. A market order gives no price guarantee and can often complete at a price far from the current Bid/Ask “real-time” quote or last-traded price.
Limit Orders are one of the most common types of orders. They allow a trader to specify the price at which to buy or sell a security. A buy can only be executed at the specified price or lower, while a sale can only be executed at the specified price or higher. The drawback of limit orders is that there is no guarantee of execution if the order can’t be fulfilled within the limits.
Stop-Loss Orders allow a trader to protect his or her investments by executing a buy or sale while specifying a “stop price.” Buy-Stop orders are placed higher than the market price while Sell-Stop orders are placed below, to limit loss. It’s important to note that a stop price is not a guarantee price but a trigger at which an order will execute in the market.
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