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Order types explained

An order consists of instructions to a broker or brokerage firm to purchase or sell a security on an investor’s behalf. An order is the fundamental trading unit of a securities market.

Market orders are placed live at current market level, which means you enter the trade manually. Let’s review what kind of orders are there.

Market orders

Market orders are placed at the next available market price, which means the trader will enter the trade manually. Intraday traders and in particular scalpers are likely to use market orders to enter the market.

Pending orders

These are orders placed that will become active trades if price crosses a specified price level. These are useful if you are an EOD (End of Day) Trader who will not be in front of the screens to monitor price. They’re also ideal to trade ‘breakouts’ (meaning when price moves out of a trading range) or for trading pullbacks. Pending orders come in two varieties.

There are two main types of order: entry orders and closing orders. An entry order is an instruction to open a trade when the underlying market hits a specific level, while a closing order is an instruction to close a trade when the market hits a specific level.

Entry orders are used to open a trade at a particular price, without having to constantly monitor the market. Closing orders, on the other hand, are used to lock in profits if a market is moving in your favour or to cap losses if its price moves against you.

At the same time pending orders include:
  • Stop orders, which are orders to sell below the current price or orders to buy above the current price
  • Limit orders, which are the inverse of stop orders: orders to sell above the current price, or buy below the current price

Stops and limits can be particularly useful for customers who wish to carefully control their risk exposure.

Example of stop orders

The chart below illustrates buy stop orders (buying at a higher price) and sell stop orders (selling at a lower price). These orders can be used to cap losses; for instance, you can place a sell stop order to close out a buy order you placed earlier, and thus limit your potential losses. Alternatively, stop orders can be used as part of momentum strategies (for instance, if you want to initiate a sell order, but only after price has begun gaining downward momentum).

You can use stop orders to close positions and to open them, by using either a stop-loss order or a stop-entry order.
  • A stop-loss order is the common term for a stop closing order, an instruction to close your position when the market value becomes less favourable than the current price
  • A stop-entry orders enables you to open a position when the market reaches a value that is less favourable than the current price

Example of limit orders

The chart below illustrates buy limit orders (buying at a lower price) as well as sell limit orders (selling at a higher price). These orders are useful for customers who wish to sell an asset they bought previously at a higher price, thus locking in a profit, or to buy automatically if price falls.

Like stop orders, limit orders can be used to open and close trades. There are two types:

  • A limit-entry order enables you to enter a trade when the market hits a more favourable price, and are generally used when you know the price you want to pay for an asset
  • A limit-close order enables you to close a long position at a higher level than the current price, or a short position at a lower level