Trading 101: Order Types Explained

Table of Contents

Introduction

Trading can be a lucrative investment opportunity for those willing to take the risk. But to succeed in the fast-paced world of trading, it’s essential to understand the different types of trading orders. From limit orders to market orders, stop orders, conditional orders, and more. Each type can significantly impact your investment outcomes. In this article, we’ll look at these order types and their pros and cons, so you can make informed decisions and get better results in your trading journey. Whether you’re a beginner or an experienced trader, this guide to trading 101 is a must-read.

Limit order

As the name implies, a limit order limits the price range that an investor can buy or sell. More straightforwardly, it is an order to buy or sell at a specified price. For instance, an investor wants to get shares of a company’s stock for not greater than $5. The investor can put a limit order for the amount. It will only activate when the stock price is $5 or lower.

Consequently, the order will not push through if the stock price exceeds $5. The order prevents investors from buying or selling stocks at a price level they don’t want. Still, this type of order has its downside. A limit order gives an investor no assurance that the order will push through. The order may only be suitable when an investor knows they can purchase lower than the current price.

Market order

A market order is the most basic trade order type. It is commonly used when an investor wants to buy or sell immediately at the current price. Also, it is popular with investors who want to buy or sell stocks or coins immediately. This type of order will be executed near or equal to the current ask or bid price.

However, there is no guaranteed price as the markets are fast-paced and volatile. Investors should know that the prices fluctuate. They must remember that the last price traded may not be the actual price when executed. Nonetheless, if done on stocks with a high daily volume, the price will be close to the bid/ask prices.

Stop order

A stop or stop-loss order is executed when the stock price reaches a specific threshold. The threshold is called the stop price. Once it is reached, the stop order switches to a market order. There are two types of stop orders.

The first one is the stop-sell order. For instance, an investor wants to sell stocks for $30 per share. The stop order will be idle until the price reaches or drops below $30. Once it hits the stop price, it will become a market order and sell for the best available price.

A stop-buy order has the same concept. The investor commands a stop-buy order to buy stocks at a higher price (or the stop price) than its current one. Once it reaches the stop price, it will convert to a market order.

Conditional order

Conditional order consists of two or more criteria set by the investors. The order will not push through if the conditions are not met simultaneously. It can be used best for investors who don’t want to monitor the market regularly. A conditional order combines different order types like limit and stop-orders to function.

For example, a stock trades at $150 per share, and you want to buy some when the price lowers. Investors can put a stop-buy order set at $130 and a day order. These criteria mean the stock will be bought at the stop price and canceled after the day ends.

Trailing Stop Order

A trailing stop order is much like an ordinary stop order but needs some adjustment. Typically, a stop order lets a trader determine a stop price below or above the market price. However, this time, the stop price is not specified. Alternatively, the stop price of this order type is either in percentage or in dollars and refers to as the trailing stop price.

True to its name, this stop order trails the market price when going in a more favorable direction. In contrast, the order will remain in its last position when the market price moves in a disadvantageous direction. A trailing stop order is more adaptable than a stop order as it adjusts automatically by following the market price.

Final Thoughts

Understanding the different types of trading orders is crucial for you as an investor looking to succeed in the fast-paced trading world. Each order type has pros and cons, and it’s essential to consider them carefully when making investment decisions.

Limit orders are useful for setting price ranges, while market orders allow immediate trades. Stop orders protect against losses; conditional orders combine different order types to function. Lastly, trailing stop orders adjust automatically by following market prices. Knowing these order types can help you make informed decisions and get better results in your trading journey, regardless of your experience level.

Learning technical analysis is also essential for getting better trading results. 

Learn about the different order types and how they can impact your investment outcomes in this article. From limit orders that restrict the price range, to market orders that execute trades at the current price, to stop orders that activate at a specific threshold, and more, discover the pros and cons of each order type. Whether you're a beginner or an experienced trader, understanding these trading orders can help you make informed investment decisions. Don't miss out on this informative guide to trading 101.

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