Greetings traders and welcome back. Thank you for joining me, yet again.
Chris here bringing you another Survival Guide.
In today's discussion, we will be talking about stock order types.
These are the different orders that exist out there for you
to choose from, as you're working your way into buying or
selling an amount of something from the market.
This is a valuable course for those of you that are just
getting started to trading because
knowing the different orders that exists
is a crucial aspect to making sure that you're
doing something in the most efficient and profitable manner possible,
especially if you plan on passing the Gauntlet Mini as well.
Without further ado, let's dive on into it and get on going.
Getting familiar with the different types of stock
orders is really the first place a trader wants to begin their journey.
It's one of the easier things to grasp, and it lets you know
the rules of the game before you play ball, so to speak.
It's something that can help you in the long run
because you might find a strategy that
favors one order type over the other.
The market order is the first order that we'll discuss.
This is the most basic type of stock order that exists,
and if you've ever used a trading simulator or done
anything in the trading world whatsoever, you've probably
already experienced or, even used a market order,
even if it was with the simulator money. With the market order,
the trader is buying or selling an instrument instantaneously,
or at least that's the goal, with no delay, hopefully, and
they're doing it at, or as close to, the current price as physically is available to them.
The market order is going to be an order where you're saying,
"I want it now. I need it now. Give it to me as soon as absolutely possible."
That is, in essence, the market order.
The reason that markets nowadays are so complex is due to the fact that trading
is happening at an extremely high speed, at an extremely high rate.
The volatility is often high, and the display price rarely
manages to reflect everything that is happening behind the
curtain, so to speak. In volatile, or unstable markets, for example,
the last traded price you see on the display
will most likely differ from the price at which your market
order will actually execute. This is something to be aware of market orders.
There is the potential for this slippage, as it's called, between
the price you're intending to get, and the price you actually receive.
When do traders choose to use market orders?
Well, if a trader wishes to buy or sell something instantaneously
in short. It's a situation in which the trader is saying
that the risk of a potential slippage is low enough, or does not
outweigh, the potential reward of getting in in that exact moment, at that exact time.
The market order means, "get me in as soon as possible,
even if the risk may be slightly higher with the slippage of price."
Our next order type is the limit order.
The limit order is most traders' best friend because it allows
for a smooth, calculated approach into the market. A limit
order allows the trader to buy or sell at a specific price.
However, it does not guarantee the exact moment that the
order will be executed. We can understand this simply
if we were to imagine that we were looking to buy a particular stock,
but we only wanted this stock, we'll call it XYZ,
when it reached a price of $50, and it is currently sitting at $80.
In order to get the entry into the market, we need price
to fall, and the duration of how long it's going to take that
price to fall, obviously, resides on a number of different factors.
The limit order does not guarantee an entry time
per se, but it does guarantee an entry price.
There are two main types of limit orders.
We have a buy limit and we have a sell limit. These are rather self-explanatory.
The buy limit is going to be a limit order to buy a particular
instrument at or below the current bid.
Remember, the bid is the price that were choosing to buy at.
The sell limit order is going to be the opposite. It's going
to be an order to sell a specific instrument, at or above
the current ask. We can think of the ask as the asking price.
We have the ask and the bid. The limit order and the
sell limit order are going to be a set number to perform one of these actions.
When do we want to use limit orders?
Well, quite simply, we use a limit order when our trading strategy
is not time sensitive and our main goal is buying or selling
at a specific price. Usually, the logic behind buying or
selling at a specific price is because when price reaches this location,
it is fulfilling our criteria for a bullish or bearish expectation.
An example of this would be if we
were setting a sell limit order just below an area of support
and we were waiting for the market to break that area of support.
In which case, our limit order would finally be triggered, and we
could sell with our expected bearish momentum that is generally expected to carry over from a support break.
Obviously, the reverse could be held true with a buy limit order trying to
get the market to attain an area of support.
Our next order type is the stop order. This is usually
most traders' least favorite friend on initial appearance
because it generally means something has not gone our way.
Stop orders allow us to buy or sell an instrument at its market price
once it has reached the initially set stop price.
Once price reaches the stop price, the stop order converts
into a market order, and essentially, closes our position out.
Stop orders are quite similar to limit orders in the sense that their
main goal is to buy or sell at an exact price, but unfortunately,
it is to cancel out an already going position.
A buy stop order is usually placed above the current market bid and
becomes active only once that level is reached. Once this
happens, the stock order is then converted into a market or
limit order. The sell stop order, on the other hand, is placed
below the current market rate, and then becomes active once the level is reached.
Traders will usually place their stop orders on the opposite side
they're are hoping the price to go.
For an example, a bullish trader will place stop orders on a lower price level while
a bearish trader will place their stop order on a higher price level.
The idea is to prevent or minimize their losses.
While these orders are not the favored outcome, they are
a very valuable tool for a trader to understand how to curb their losses.
There are three main types of stop orders.
The first of which, is called the stop market order. Stop
market orders are also known as a stop loss order.
These are amongst the most widely used stop orders in existence.
Unlike the limit and market ones, the stop market orders don't
get activated until a particular price level is reached.
Once this happens though, the stock order is converted into a market order and the
trade gets executed at the market price.
An example of this would be if we were to trade, say, Apple
stock, and if we were to place a stop loss sell order at, say,
$450, assuming that we were in at a price higher than that,
it will remain inactive until that particular level is reached.
Once price falls to $450, our sell order will be executed and the shares would be sold
at the best possible price.
Our next stop order type is the stop limit order.
Stop limit orders are very similar to stop loss orders.
However, here we have the fact that a limit has been set
on the price at which the trade will get executed.
The main difference here is that instead of becoming a
market sell order, the stop limit order effectively becomes
a limit order that executes, only when, the limit or a better price is reached.
Aside from that, stop limit orders basically combine the best of both worlds,
stop and limit orders. They ensure a particular price, but don't
guarantee that the order is going to execute at a specific time.
Stop limit orders consist of two prices; a stop price and a limit price.
To understand the difference, let's say that
we decided to place a stop limit order with
a stop price of $100, and a limit price of $99. In that case,
once the price drops to $100, the limit order will get activated. However,
the instruments won't sell unless they can guarantee
a price of at least $99 or better.
In this case, you will sell for anything below $100, but above $99.
Finally, we have the trailing stop order.
The trailing stop order is a more advanced form of a traditional stop order.
The trailing stop order is quite cool in the fact that it
allows us to set a stop order that actually moves.
The way a stop order works when it's trailing, is it's going to trail behind
the current highest location that price has reached since
the order was put in place, and it is going to trail behind
a specific amount until the market falls backwards that amount
and triggers the order to sell out or to buy out,
depending on the direction of the order.
It is something that will allow us to secure profits potentially,
while not constantly having to monitor the market because
it is going to go up with price and allow the winning trade to continue to win,
but if the winning trade starts falling back to a certain
degree of whatever we have it set to, it can be a percentage
or a specific number of pips, or what have you, then it will
trigger the order and close the position out,
locking in whatever profits that we had gained up until that point.
The idea of using a stop order is relatively simple.
We can use it to lock in our profits and limit our losses.
That is what encompasses all of the different stop orders.
It can allow us to tell the market to close out something,
to stop something, that has already begun.
Any type of a scenario where we want to stop one of our
orders, to either lock in profits, or to prevent any further
losses, a stop order is usually a good tool to incorporate.
The orders covered up until this point are the most common order types out there,
but they are still not all of the order types out there.
We're going to do a quick summary on all of the other options out there
for the most part,
which is going to start off with a GTC order.
This is a Good Till Canceled order. This is another one
that is still popular amongst the stock trading community.
The GTC traders can set a time restriction on their position
and, as the name suggests, the Good Till Canceled order remains active until
the cancel is done by the trader. Depending on the trading platform or the brokerage that you trade with,
the GTC order can have a maximum time limit potentially,
or you can keep it going for up to somewhere around 90 days.
Then, we have an AON order. This is an All-Or-None order.
This is a limit order that is used mostly by penny stock traders, as it helps ensure
they will trade, either the whole quantity they requested, or none at all.
Once again, it is All-Or-None.
Then, we have the Immediate-or-Cancel.
This is also known as the IOC order. On the contrary here,
the IOC order, in relation to the All-or-None, is designed
for those who want to get into a trade and capture a particular
momentum, no matter the quantity available on the market at the preferred price.
This means that, in the case where, say, a trader wanted to buy
1000 shares initially, for example, even if only 200 are available,
the order would still get executed.
This also cancels the buy order for the rest of the 800 automatically.
Then, we have the One-Cancels-Other, an OCO.
When using the OCO order, the trader is placing two separate orders.
The moment one is executed, the other is canceled.
If we were to understand how this condition works in practice,
let's pretend that we were to buy a stock at, say, $50
and we have a profit target of 20%.
We also don't want to lose more than 5% of our position.
In this case, we can place an OCO order that consists of
a take profit order at $60 and a stop loss order at $47.50.
The OCO order will get executed and either one that is filled
is essentially where we want our trade to end anyway,
so it cancels the other order.
Then, we have the take profit, which is, obviously, a very popular order.
The take profit is, quite simply, going to be an order
that we are doing to close out profits in a position.
It is allowing us to set a goal to close out a position once
it has attained the level of profit that we are satisfied with.
Then, we have our Fill-or-Kill known as an FOK.
The FOK order is a hybrid between the All-or-None and the
IOC order, our Immediate-or-Cancel.
When applied, the Fill-or-Kill requires the whole amount of the stock,
or the order in general, to be executed during a short time frame,
usually less than a few seconds, and if it cannot be, it kills the order entirely.
Finally, we have day orders. Day orders simply mandate that, a certain
position will expire at the end of the trading day, unless instructed otherwise.
An example would be, if we had a day order set to buy something
and the close of the market came rolling around, around 4:30,
and it hadn't been filled,
it kills the order so it doesn't ever trigger again beyond that point.
To sum it all up, the three main orders to be aware of,
as you're getting into your trading career,
is the market order, the limit order and the stop order.
Everything we talked about beyond that point are basically
different iterations, or versions, of how to use those types of ideas.
Basically, buying or selling at specific prices,
or as soon as available, or other time constraints
like we mentioned, with the orders there towards the end.
Either way, it's always good to practice with a demo account before you go live.
But until next time folks,
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I appreciate you, and I will see all of you very soon.
Good luck everybody, and over and out.