As a beginner, it can be confusing to be confronted with the different types of orders in trading for the first time. You quickly ask yourself in which cases which one should be used and what advantages and disadvantages they have. In this blog post, we will therefore answer this question and explain the different types of orders and show you when you have to use them.
What is an order in trading?
But first, let's clarify the term order. An order - in the context of trading - describes a request for the execution of trading orders. These trading orders are then executed via a broker or a corresponding trading platform. Ultimately, an order is an instruction to buy or sell a stock at a specific price. But how do you technically determine this price? That is accurately what the different types of orders, which are presented below, take care of.
Limit Order
With the limit order, you fetch the price to a level that is better than the current price level. That means, you anticipate where the price is going before it turns in the anticipated direction. The advantage: You enter at a better price. The disadvantage: The price initially moves against you before moving in your direction once your order is executed.
Entry with Limit Order
To enter via the limit order, you must place it below (if you want to go long) or above (if you want to go short) the current price level. In the example image, you want to enter short, so you place the order above the current price (red rectangle). Now the price rises in the best case and picks up your order (dashed line). Your limit order has been filled, and your position is open.
Exit with Limit Order
The exit works similarly to the entry. Here, the limit order acts as your target. That means, you are in a long trade and want to exit at a certain point. So, you place your limit order at the point where your target should be. It is important that the position size corresponds to your entry size. Otherwise, you run the risk of leaving residual positions in the market. So if you are currently holding a long position of 20 shares, you must remove exactly this size from the market to reach 0. So, you place a sell limit order with 20 shares on your target. If the market now reaches your target, you sell your positions and are out. At this point, you have also realized your profit.
Stop Order
The stop order is the opposite of the limit order. You enter at a price that is higher for a long entry and lower for a short entry. This order is often used to trade a breakthrough. Advantage: The price is already moving in your direction when you enter. Disadvantage: You will be filled at a worse price than the current price.
Entry with Stop Order
To enter via the stop order, you place it above (if you want to go long) or below (if you want to go short) the current price. If the price then reaches your order, the order is executed.
Exit with Stop Order
The stop order for your exit is your stop loss. That means, your order is always below (long) or above (short) the price. So if you are long with 30 shares, your order, which is below the current price, should be a sell stop order with the same 30 shares. This means that you sell the 30 shares you bought through the stop order to completely exit the position.
Market Order
With the market order, you enter the market at the current price. The market order works for both directions (long and short). This means that you are filled directly by the broker with the click of a button and your position is open. The exit works on the same principle. With a button press, you can close your entire or a partial position.
Even if you are working with market orders, we recommend that you set a stop loss. Always remember, money you don't lose is money you don't have to win.
Important note
Note that each broker has its own system. With one broker, you can only enter your target and stop loss after your order has been filled, while with another, you can define them directly at the entry, i.e. entry, stop loss, and targets are linked together. In this case, it is usually not necessary to set extra orders for targets and stop loss. So first inform yourself about the approach with your broker!
Secondly, you should keep commissions or spreads in mind. Depending on the broker, your order will be filled more or less well. This is particularly important for important news, exotic pairs, or at times with little trading volume. Because, depending on the size of your position, this can take a large share of your profit or even increase your loss.