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Learn the different ways you can open and close a position – from a simple, immediate trade to an automatic instruction to trade in your absence. Orders can help you lock in profits or guard against loss: get to know the various types and see how to use them.
|Types of orders||Limits||Stops|
|What is an order?Market ordersEntry ordersClosing ordersOrder duration||What is a limit order?Limit entry ordersLimit closing orders||What is a stop order?Stop entry ordersStop closing orders|
A stop is an instruction to trade when the price of a market reaches a particular level that is less favourable than the current price. So this means buying if the market hits a specified higher price, or selling if it hits a specified lower price.
You may wonder why you would want to trade at a worse price, but there are actually plenty of reasons why it can be a good idea. For example, chart analysis might suggest that the price of an asset might keep rising if it breaks through a certain higher level. Or, you might want to use a stop to close out a trade that’s moving against you.
Like limits, stops save you time and effort by reducing the need to monitor the market. You can use one either to open a new position (an entry order) or to terminate an active position (a closing order).
This is an order to buy when the market hits a higher level than the current price, or sell when the market hits a lower level than the current price. This is suitable if you think the market will continue moving in the same direction once it hits a certain level.
For instance, if you use charts to help you trade you might want to open a position if the market passes a level that you’ve identified as significant.
Take a look at the example below for details on how stop entry orders work.
Example: silver stop to open
Silver is currently trading at $35. Chart analysis shows that $35.50 is a significant level for this market, suggesting that if it bursts through this level it will keep moving upwards.
You decide to buy silver if it reaches $35.80, as this will mean it has clearly broken through the $35.50 level. You place a stop order to open at this level.
Two hours later, the market rises to $35.85, so your broker automatically executes your stop order and opens your trade at $35.80.
This is an order to close an open order by selling when the market hits a lower level, or buying when the market hits a higher level. This type of order is known as a stop-loss and is commonly used to close out a position at a predetermined level, effectively restricting the amount of money you could lose.
Adding a stop-loss means your position will be closed if the market moves too far against you. Set the stop at the point beyond which the level of loss would be unacceptable to you.
Take a look at the example below for details on how stop closing orders work.
Example: BHP Billiton stop to close
You own 100 shares in BHP Billiton Ltd, bought at an individual price of A$37. Some disappointing half-year results cause the share price to decline.
While you hope the price won't keep falling, if it does you don't want to risk losing too much. As such, you place an order to sell the stock if the price drops to A$32.
The price continues to decline, and passes A$32, where your stop-loss is carried out. You've lost A$500 (100 x A$5) on your shares, but if the price kept falling you would stand to lose substantially more.
Stop-losses are usually provide free of charge. However, as this type of stop is not guaranteed, your trade could be closed at a worse level than the one you specified if the market moves very quickly. This is called slippage.
As well as slippage, you should be aware of the risk of a market ‘gapping’ – moving sharply up or down with no trading in between. This can happen when prices change while a market is closed overnight, or during the day in response to an unusual event. Again, your trade may not be closed at the level you specified in this situation.
When trading CFDs, you can put an absolute cap on your risk by attaching a guaranteed stop to your position. This ensures that your stop will take effect at the exact level you have chosen; there will be no slippage, even if the price changes suddenly, and you’ll be protected against gapping.
There is likely to be an extra charge for this protection. Please note that some markets, such as options, cannot be traded with guaranteed stops.