For a transaction to be considered a trade, there must be at least two orders involved: An order to purchase a security is placed by one individual, while an order to sell the same security is placed by another individual. No matter if you are trading equities, currencies, or futures, the order types are the same as per the crypto market cap. When making trades, traders have access to a wide variety of order types that they may use in a variety of different permutations.
The following is an explanation of the primary order types, along with some examples of frequent trading applications for each.
An Overview of the Situation
- Market orders: They are processed the quickest, but they do not guarantee any specific pricing when they are carried out.
- Limit orders: They are orders that guarantee a certain price for the order, but they will not be executed at all if the prices do not exceed the original limit barrier.
- Stop orders: They are also known as “stop-loss” orders. They are an effort to reduce losses by causing a market order to be triggered if your position goes too far in the wrong direction.
- Stop limit & Market if touched orders: These three fundamental order types may be combined in a variety of ways to provide more advanced order types, such as stop-limit and market-if-touched orders.
The Fundamentals Behind Putting in Orders
It is necessary to specify whether the order is to purchase or sell, regardless of the kind of order that is being made, since a single order may only be one of these two types. The purchase and sale of securities are both possible with each of the order types described below.
Orders to purchase and orders to sell may be used at either the beginning of a deal or its conclusion. If a deal is opened with a purchase order, then it must be closed with a sell order to be considered completed. When a trade is opened with a sell order, the position will be closed out with a purchase order at the end of the transaction.
For instance, the easiest trade that a trader may make is when they anticipate that the price of a stock will go up. This trader will begin the trade by placing one purchase order and will afterwards leave the deal by placing one sell order. If the stock price has risen in the interim period between those two orders, the trader should be able to earn a profit when they sell the shares.
However, a trader who anticipates a decline in the price of a stock would begin the trade by placing one sell order and then would exit the deal by placing one purchase order. It is more customary to refer to this practice as “shorting” or “shorting a stock.” In this strategy, the stock is sold initially, then purchased again afterwards.
What Are Market Orders?
There is no limit placed on the amount that market order may buy or sell at any particular moment, notwithstanding the price at which the transaction is executed.
Traders should anticipate that their market orders will be completed swiftly in a crowded market; but they should be prepared for the possibility that their orders may not be executed at the exact price that they want them to be.
Market orders can be set to acquire a stock at the best possible price; however, the order may be for a popular stock that trades millions of shares daily. It’s possible that the price will go up to $129.50 in the few seconds that pass between when the order is placed and when it’s really carried out. If the trader wanted to purchase the crypto stock, they would have to pay a higher price if they used a market order. After you have placed a market order, you may experience slippage if the price moves against you.
Market orders are the way to go if you need your purchase to be processed as quickly as possible but are willing to accept a price that is somewhat different than what you would ideally want to pay. When you put in a market order, it will be fulfilled at the “ask” price since there is already someone else prepared to sell at that price. Considering the “bid” price represents the current price at which someone else is willing to pay, your market order will be fulfilled at that price.
What Are Limit Orders?
Limit orders are requests to buy or sell a product at a predetermined price or better. 1 They may or may not be filled, depending on market conditions and the price at which the trader sets the stop loss. When they do get filled, however, it will always be at the amount the trader expects to pay. Consequently (or at a better price than expected). If the transaction is not fulfilled, limit orders may be used to guarantee you get a price that is acceptable for your requirements.
If the order is to buy or sell, the response to “which is best” is different. As an example, a limit purchase order of $50.50 for a stock would only be fulfilled if the stock was available for less than that price when the order was made. If your broker cannot discover a buyer willing to sell you the shares at a price lower than $50.50, your transaction will not be executed.
To sell at $50.50 or greater, you’d place a limit sell order and set the price at $50.50, for example. You’d be able to get the most money for your shares if you did this. It would only be possible to fulfill the order if another party offered you at least $50.50 for the shares.
What are Stop Orders?
In many ways, stop orders and crypto market orders are the same thing: they are instructions to purchase or sell a security at the best available price. To execute these orders, the market must achieve an agreed upon price. This sort of order is intended to restrict losses since the price is set in the opposite direction of the trader’s desire for the stock to move. These directives are commonly referred to as “stop-loss” orders.
If your stock is presently valued at $12.57, for example, you may put a sell stop order at $12.50. By placing a stop order on a stock when its price drops below $12.50, you’re immediately selling it at the best possible price. Unless the price drops below $12.50, nothing will happen.
Stock shorting requires the use of stop orders to purchase as well as sell, which may not be available to new traders. Investors shorting a stock may put a stop order above the price where they shorted the stock to protect themselves against a rapid rise in the stock’s value.
Note that shorting a stock implies selling it initially, then re-buying it later to finish a position (hopefully, after the price has fallen). Shorting a stock at $50.75 allows the trader to use a stop order to purchase it at $60. As a result, the company will immediately exit a losing position whenever it loses $0.25 per share.
What Are Stop Limit Orders?
Traders often combine a stop order with a limit order to get a price that is more precisely tailored to their needs. Stop-limit orders function in the same manner as standard stop orders, with the exception that when the target prices are reached, they transform into limit orders rather than market orders.
Stop-limit orders, which are very similar to ordinary limit orders, provide a trader the assurance that they will get a certain price, but they do not provide a guarantee that the order will be filled.
The stop price and the limit price of an order that uses a stop-limit strategy might be different from one another. For instance, a trader who is setting a stop-limit sell order has the option of establishing the stop price at $50 and the limit price at $49.50. Once the price of the stock fell below $50, the stop-limit sell order would transform into a limit order automatically. However, the trader’s shares wouldn’t be sold unless they were able to get a price of $49.50 or higher.
What Are Trailing Stop Orders?
Stop orders and stop-limit orders can be established at a fixed price or based on the market. A trailing stop order swings with the market price (or trailing stop-limit order). Traders utilize this to safeguard gains.
Traders may purchase stocks for $50. A week later, the stock may be $53. A trader may establish a $2 trailing stop order to sell below market price. If the stock drops below $51 the following day, the trailing stop order becomes a market order to sell, locking in a profit for the trader. The trailing stop order trigger would rise to $53 if the stock price rose to $55 the following day.
The trigger price for trailing stop orders is a monetary amount or percentage of the market price.
What Is Market If Touched Orders?
Unlike limit orders, market-if-touched (MIT) orders don’t guarantee a price. This helps them execute faster while enabling investors to select target prices instead of purchasing at market pricing. If the price is hit, the MIT order becomes a market order.
A trader may wish to acquire a $70 stock but not spend that much. They may acquire MIT for $60. If the stock falls below $60, the MIT order becomes a market order, and the trader buys it.
What Are Limit If Touched Orders?
A limit-if-touched (LIT) order functions similarly to a market-if-touched (MIT) order, with the exception that it places a limit order rather than a market order. The trader can specify both the trigger price and the limit price with 4 LIT orders, which differentiates them from regular limit orders.
Take, for instance, a stock that is now priced at $16.50. At a price of $16.40, a LIT purchase order trigger could be triggered, and a price of $16.35 might be specified as the limit price. If the price drops below the trigger price of $16.40, a limit order will be placed at $16.35; otherwise, the order will not be executed. Because it is a limit order, shares will only be purchased at a price that is lower than $16.35 a share. Even if the LIT trigger price has been achieved, your purchase order will not be executed if no one is ready to sell you shares for $16.35 or less. This is the case even if there are other buyers.
The Bottom Line
Traders with experience will utilize most of the order types that are mentioned in this article, if not all of them. Your trading approach and the sort of position you have will indicate when you should leverage each one.