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An order is simply an instruction to open or close a trade. You give it to your provider so that they can execute the trade on your behalf – saving you time, as well as enabling you to lock in profits or guard against loss.
There are various types of order that are available for you to use; here’s a guide to some of the most popular.
What is a market order?
A market order is an immediate instruction to buy or sell an asset at the best available price. This type of order ensures that your trade will be executed, but there is no guarantee of the price it’ll be executed at.
A market order is beneficial if you need to buy or sell a market quickly, rather than within a specific price range. For example, if you’re caught in a bad position and want to sell regardless of cost, a market order can get you out quickly and potentially minimise further losses.
If you’re trading in a liquid market then a market order will usually be filled close to the last quoted market price. However, in certain circumstances you may find the price can jump, and your order is filled further away – this could be a more favourable price, or it could be worse.
What is an order level?
An order level refers to the price at which you want to enter or exit a market, allowing you to set a point that you want to buy or sell at. It is not a guaranteed level, but rather a price through which the market has to move before your order is triggered.
With a market order, you don’t set an order level. Instead, your trade is executed at the best available price. However, there are two main types of order that do enable you to set order levels. These are called entry orders and closing orders.
An entry order is an instruction to open a trade when the underlying market hits a specific level. You can use an entry order when you are hoping to trade at a particular price, but do not want to constantly monitor the market. They are also called orders to open.
Using an entry order can enable you to execute trades even when you are not logged in to your trading platform – some markets are impossible for you to monitor all the time, for example forex, which is open 24 hours a day.
A closing order is, as you may have guessed, the opposite of an entry order – the instruction to close a trade when the market hits a specific level. You can use them to lock in profits if a market is moving in your favour, or to cap losses if its price moves against you.
In the same way as entry orders, orders to close enable you to trade without having to monitor your positions constantly – your position will close automatically once the market reaches your chosen level.
When you set your own order level on a trade, chances are you’re using either an entry order or a closing order. Both types come in two different varieties, though, called limit orders and stop orders.
What is a limit order?
A limit order is an instruction to trade if the market price reaches a specified level more favourable than the current price. If you are looking to buy a market, this will be lower than the current market price, whereas if you are looking to sell it would be higher. You can use limit orders to both open and close positions:
- A limit entry order enables you to enter a trade when the market hits a more favourable price, and are generally used when you know the price you want to pay for an asset
- A limit close order enables you to close a long position at a higher level than the current price, or a short position at a lower level
The major drawback of limit entry orders is that there is the possibility it will not be filled if the market never reaches your order level – in this case the order would expire.
Limit orders will usually be filled at your chosen price, or sometimes even a better price if one is available at the moment the order becomes filled.
Stop orders are an instruction to trade when the price of a market hits a specific level that is less favourable than the current price. Like limit orders, you can use stop orders to close positions and to open them.
What is a stop-loss order?
A stop-loss order is the common term for a stop closing order, an instruction to close your position when the market value becomes less than the current price. Because a stop closing order is used to stop your loss, it is usually referred to as a stop-loss order.
For example, you own 100 shares of a company that you bought at 370p a share. The CEO of the company announces his retirement, causing the share price to decline. While you expect this decline to be temporary, if the price continues to drop you don’t want to risk losing too much money. So you decide to place a stop loss order at 320p.
The price continues to decline, and passes 320p, at which point your stop order is carried out. Though you have lost £50 (100x 50p), if you hadn’t put a stop loss in place it could’ve been considerably more.
There are three main types of stop-loss order:
- Basic stop-loss orders trigger when the market reaches your set order level. Like with market orders, though, your trade can be closed at a worse price than the level you requested if the market moves quickly – so you risk losing more money than anticipated
- Guaranteed stop-loss orders work in the same way as basic stops, but ensure that your position is always closed at the exact level you selected, regardless of volatility. If your guaranteed stop is triggered there will be a small premium to pay
- Trailing stop-loss orders follow the market if it moves in your favour, and lock if it moves against you. You decide exactly how closely the stop follows the market price by entering a trailing step size. For example, if your step size is 20 points, then every time the market moves up ten points, your stop will move ten points to follow it
It is also possible to use stop orders to open positions – known as stop-entry orders. Though it may seem strange to open a trade at a worse price, stop-entry orders can allow you to take advantage of upwards market momentum.
For example, say Brent Crude oil is currently trading at $63.50. Your chart analysis has shown that $64.00 is a significant level for this market, suggesting that if it hits this level it will continue moving upwards.
You decide to buy Brent if it reaches $64.80, and place a stop-entry order.
Two hours later, and the market has reached $64.80, so your broker executes your stop and opens your trade. If the market continues to rise, you would profit.
Order duration refers to the length of time your order will remain open until it expires. You can choose to leave your order open until you decide to close it, or set an expiry date. These two types of order duration are called good 'til cancelled (GTC) and good 'til date (GTD).
Good ‘til cancelled
GTC orders remain working until you cancel them yourself, or until they have been filled.
Good ‘til date
GTD orders require you to select a specific date and time that you want your order to run for – if it has not been filled by this date, it will be cancelled.
Using orders correctly can be great way of save you time and effort when trading, with the potential to maximise profit as well as reduce risk – but it should form just one part of your overall trading strategy.