A trade order is an instruction to your broker on how and when to buy or sell a position. There are several different types of orders a trader or investor can use to execute a trade based on their goals. A trader may want to get in a position at any price or out at any price. An investor could want to buy or sell at a specific price and do nothing if the market does not provide that price.
Here are the primary types of broker trade orders used to enter or exit a position.
A market order is used to immediately buy or sell a stock or asset. With this type of order you will immediately get an execution to buy or sell at the current market bid or ask quote available to your broker for a fill. You usually get a fast order fill but the price is not guaranteed at any level and the slippage from your expected price and your fill will be based on volatility, liquidity, and the speed of your broker.
A limit order specifies the exact buy or sell price that the trader wants the trade executed at. It must be the limit price asked for or better or no trade is executed. This type of order is for a trader or investor that believes they can get the price they are asking for eventually if they are patient and they willing to miss the trade if they can’t. This can cause an entry or exit signal to not happen if the price asked for is not available. While it can prevent bad order fills for exits it can also cause a trader to be trapped in trades that were supposed to be sold only to see a price go even lower. Price volatility can cause limit orders to be missed entirely at entry of exit.
How are limit orders and market orders different? A limit order controls the price your trade will execute at and can get you the best price possible or cause you to miss a trade altogether. A market order insures that your trade will be filled but the price of the execution can be much worse than the expected bid or ask when the trade was placed due to slippage. The higher the liquidity in a market the more accurately a trade will be filled.
A stop order, (also called a stop loss order) is a risk management tool when a trader enters a specific price to sell a position at if the market reaches that level. If price action hits the set price entered then the stop order becomes a market order and the position is sold at the next available price to limit further losses.
A buy stop order is set at a specific higher price target above current price levels. It is used most of the time as a momentum trading tool to buy at higher prices when a breakout of a price range occurs. The purpose of using a buy stop is for buying high and selling at even higher prices in the future during an upswing in price action. A buy stop can also be used as a risk management tool for a short position as either a stop loss to prevent big losses or a trailing stop to lock in profits.
A sell stop order is set at a stop price that is lower than the current price in the market. Traders and investors usually will enter a sell stop order to either limit a loss on an open position or to protect an open profit by using it as a trailing stop on a winning trade. A sell stop order can be set up to open a short position in a margin account. For a long position a sell stop is commonly used as a stop loss or a trailing stop.
An all-or-none order directs a broker to buy or sell a stock but must be executed the way it is entered in its entirety, or not executed at all. All-or-none orders that can’t be executed immediately as requested stay active until they are filled or cancelled. AON orders are commonly used for illiquid and low volume markets like to buy over the counter/pink sheet penny stocks or microcap stocks. The all-or-none order either gets filled at one time with the entire quantity of the stock position wanted or none. This type of order will go unfilled when a stock is too illiquid to find enough shares and even more unlikely to fill if it is also a limit order for price or time frame. All-or-none orders are primarily used to specify both quantity of shares and price.
An immediate-or-cancel order states that if any amount of an order can be executed as a market order or at a limit right now, it can be filled and then the rest of the order should be canceled. If no stock shares are traded immediately, then rest of the order that could not be filled per the request will be completely canceled. These are orders in the time frame of seconds.
A fill-or-kill order combines the parameters of an all-or-none order with an immediate-or-cancel order. The fill-or-kill order directs the broker that the entire order size must be filled per its parameters for the trade immediately or cancelled completely. If all the conditions are not met, then the entire order is canceled. These are orders set to take place in seconds or not at all.
A good ’til canceled order has a time restriction that a trader can set on different orders. A good-til-canceled order will remain active and in place until it is canceled. Brokers will usually limit the maximum amount of time a GOC order can remain open and active to 90 days. A day order is the usual time frame of expiry with the GTC order if none are specified. After the close of the trading day the order will expire if it isn’t filled and it will need to be reopened the following day.
Be sure to understand your goals and results of using any of these specific types of orders when you buy and sell. There are big differences between them all.