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Market order, limit order, stop-loss order, trailing-stop order. There are numerous order actions available for traders to utilize.

Here’s a picture displaying the most common order types on Fidelity

Figure 1.1 Order Types

Market Order Types

Here’s a similar list on Robinhood,

Figure 1.2 Robinhood Order Types

Robinhood Market Order Types

Learning the various order types might seem inundating at first, or unnecessary. However, there quite easy to learn, and each order type offers an advantage in exploiting entries and exit. You will benefit from knowing how to use the various order types. Be sure to learn them!

Market Order

A market order are the most commonly used order. Market orders are placed to buy/sell with immediacy at any price within the bid/ask spread. You have no control over what exact price your order fills at; your broker will try to get shares in your portfolio, or out of your portfolio, as quickly as possible. This is typically fine for a highly liquid stock with a narrow bid/ask spread. However, an illiquid stock with a wide bid/ask spread spells danger for market orders.

Assume the bid/ask is $100/$110, and the current stock price is $105. If you place market order, it’s entirely possible you get filled at a price much higher than the current market price, say $107.50. Now, let’s say you don’t like the price at which your order filled, so you place a market order to sell your shares. The bid/ask is still $100/$110 and the current market price $105, it’s entirely possible your order sells far below the current market price, say $102.50. Hypothetically, you just ate a $5 loss per share by using market orders for an illiquid stock with a wide bid/ask spread. Illiquid stocks generally have a wide bid/ask spread.

Again, your broker is trying to get you in, or out, of a position as quickly as possible. Market orders should be placed on narrow bid/ask spread, highly liquid stocks only, or when you aren’t concerned with the price for which your order fills. You can alleviate this issue by using limit orders.

Limit Order

Let’s entertain our hypothetical market order dilemma once more. The issue could have been avoided by placing a limit order. A limit order allows you to specify the exact price at which your willing to buy/sell shares, or better. If you had set a buy limit order at $105, which is the current market price, you will not buy shares of the stock for any price greater than $105. The downside to this is your order likely won’t fill with immediacy.

An advantage of limit orders is that the potential fill price isn’t limited to the defined figure. If someone is looking to sell shares of $XYZ for $103, and you have a buy limit order placed at $105, you two may match and complete a transaction – you will buy the other trader’s shares for $103 per share. You can also do this when setting a sell limit order.

Letting our winning positions run is important, but holding a winning position as profits quickly diminish is generally ill-advised.

A commonly employed practice is to set limit-orders at a predetermined percentage profit. Let’s say you open a position with a profit target of 5%. You can set a limit order to close the position when earning 5% of your initial investment. Limit orders can also be placed at a dollar amount away from the current price. I could set a limit order $5 above my entry-price. Assuming the market is liquid, if prices increase $5 my position will automatically close for a profit.  Prices might continue increasing/decreasing after your limit-order executes, resulting in missed profit, and this can be frustrating. However, we must remember that trading is a numbers game and our ultimate objective is consistent profitability. In addition, we must take what the market gives us. If we are consistently seeing 5% returns on our profitable trades, and only losing 2% on our losing trades, we are going to make money, even if we are losing 50% of our trades.

Trailing-Stop Order

Trailing-stop orders are critical for new traders to implement. A trailing-stop orders functions just as it sounds. If prices move a precisely defined percentage amount, or dollar, against your position: a market order to close the position will execute. Trailing-stops are great for securing profits and ensuring you don’t sit on a losing position breaching your risk tolerance.

Assume I buy 100 shares of XYZ at $100 per share, and set a trailing-stop order for a 3% move against the position. When prices move 3% below the highest price reached my position will automatically close. If prices reach a high of $110 and decrease 3% from that amount, my trailing-stop order will activate and my position will close. The same concept applies to a short position. If prices move a defined percentage amount from the lowest low, your trailing-stop will activate and the position will be closed. This order only executes during market hours; your position will not close during a substantial pre-market price move.

Trailing stop-loss orders convert to market orders. This means that once prices hit your trailing-stop price, say 5%, or $5, below the high, a market order will activate to sell your shares at the best available price. You don’t have control over the exact amount your shares sell for with a market order, but this is typically fine in a highly liquid market with a narrow bid/ask spread.

Stop-Loss Order

Stop-loss orders are similar to trailing-stop orders, except they do not trail price movement. Assume I buy 100 shares of XYZ at $100 per share. If I set a stop-loss order at 3% below my entry price, and prices decrease 3%, my position will close. If prices increase to $110, my stop-loss order remains stagnant; my position won’t automatically close unless prices decrease 3% from where I set the stop-loss. Stop-loss orders can trigger at a predetermined dollar amount as well. I could set my hypothetical stop-loss order to $97 instead of 3% below my entry price.

Stop-loss orders convert to market orders. This means that once prices hit your stop price, say $97, a market order will activate to sell your shares at the best available price. You don’t have control over the exact amount your shares sell for with a market order, but this is typically fine in a highly liquid market with a narrow bid/ask spread.

Stop-Limit Order

A stop-limit order combines the aspects of a stop-loss and limit order. This might sound confusing – let’s cover an example.

Assume that $XYZ is trading at $100 and you to buy the stock if an uptrend begins, but you’re not certain there will be an uptrend so you do not want to buy before it actually happens. You can place a stop-limit order to buy shares and set the stop price a $215 and the limit price at $225. If $XYZ moves above $215 (Stop price), the order is triggered and converts to a limit order. If your order can execute below your $225 limit price, your order will be filled. If your order can’t fill before $XYZ moves above the $225, the order is canceled entirely.

Setting a stop-limit order to buy should be placed above the market price. Setting a stop-limit order to close/sell should be placed below the market price.

Assume your stop-limit buy order executers at $220, and $XYZ experiences strong bullish momentum thereafter and prices reach $300. You want to close your position when the uptrend exhausts. Why not just use a trailing-stop order? Well, a trailing-stop order converts to a market order. This means that once the predefined stop-price is hit, your broker automatically executes a market order to close the position. A market order is typically acceptable in a highly liquid market, but you have no control over the exact price at which your order gets filled. A limit order gives you control over the exact price your order fills at, so long as someone is willing to make the trade with you. You can set a sell stop-limit order at $290 (stop order) with a limit order of $285. This means your limit order will activate, not execute, if $XYZ falls to $290, and the least amount you’re willing to sell your shares for is $285. Your position won’t close for anything less than $285 per share. If you set a sell limit order at $285 without using the stop feature, and $XYZ is trading at $300, your broker would automatically look to close your position at any price above $285. This would be problematic.

With a stop-limit order, you’re essentially telling your broker “I want to buy/sell shares at price X, but I don’t want to do it until price Y is reached”.

Trailing-Stop Limit Order

A trailing-stop limit order is essentially the same as a trailing-stop order, except a limit order is activated as opposed to a market order. A trailing-stop limit order allows you to specify the price increase/decrease that must occur for you to buy, or sell, shares of the underlying stock, and the exact price, or better, you’re willing to buy/sell those shares at. This order allows for precise entry and exit points.

Time in Force

Time in force specifies the duration an order will remain active/pending until it is cancelled.

Good Until Canceled

A good-til-canceled order remains active until you cancel it. This means if your order is not filled immediately, the order will remain pending until it is filled, or until it expires. You can specify the number of days the order remains pending, typically up until 90 days. For example, if stock $XYZ is trading at $80, and you place a limit order at $70 that remains active for 30 days, you’re telling your broker you want to buy $XYZ for no less than $70 within the next 30 days. If no one is willing to sell you shares of $XYZ for $70; prices never trade near $70, your order will expire after 30 days.

Good For Day

Most orders are intrasession orders. When you place an order, it usually deactivates at the end of the trading session unless specified otherwise. Until you are comfortable with the various order types and have some trading experience under your belt; you’ll likely benefit from place “Good for Day” orders.

Fill or Kill

Fill or kill orders are orders tha must be filled immediately and entirely (no partial orders). If this fails to occur, the order will be cancelled. This can be good when a strong price move is happening that you don’t think will last very long, and you want to buy/sell a large quantity of shares immediately.

Immediate or Cancel

An immediate or cancel (IOC) order is similar to a fill or kill order. However, a fill or kill order must be executed entirely (no partial fills). An IOC order can partially fill, and the remaining shares pending to buy/sell will be cancelled after the fill.

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Legal Disclaimer: The information contained in the article is not intended as, and shall not be understood or construed as, financial advice. The author is  not an attorney, accountant, or financial advisor, nor are they holding themselves out to be, and the information contained in this article is not a substitute for a professional who is aware of the circumstances and facts of your personal financial situation. 

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