Types of commands
Check out our guide to the types of buy and sell orders in trading that help save time and manage risk.
Traders can effectively manage risk using different orders, saving them time monitoring the market and reducing emotional bias in trading.
Market Orders allow immediate trading at the current price while Pending Orders allow trades to be scheduled until a specific price is reached.
Stop Loss and Take Profit orders help limit losses and lock in profits at pre-determined price levels.
Limit orders are filled at the specified price or better, while stop orders are filled at the specified price, but may also be filled at the current market price.
Market Orders
A market order is the simplest type of order on a trading platform. Market orders allow traders to place immediate trades at the current market price. If you're monitoring the market and ready to enter or exit a trade at the current price, a market order is sufficient.
But remember that market conditions can change very quickly, so your order may not be executed at the exact price specified if there is an electronic order execution delay – meaning the order is filled when the broker receives the order volume and confirms it at the specified price.
There are two types of market orders: buy and sell. When you choose 'buy,' you ask the broker to buy a specified quantity of an asset at the spot price or the next best price. When you choose 'sell,' you ask the broker to sell a specified quantity of borrowed asset units at the spot price or the next best price, with the goal of repurchasing them later when the price declines to make a profit. This process is sometimes referred to as "short selling."
It's important to note that all market orders are subject to slippage risk; this occurs when the execution price differs slightly from the price you selected in your order. Slippage can be positive or negative depending on the price direction and can sometimes work to the trader's advantage.
Slippage describes a price difference resulting from a delay between the time an order is placed and its arrival in the market. You can always expect a slight time lag (microseconds) between the trade being executed and the order being received electronically by the broker's server. By the time the broker's server executes the order, the price may have moved up or down, especially in highly volatile markets. A strong, stable, and low-latency connection can reduce the risk of slippage. High-frequency trading (HFT) has become popular over the past 20 years, using computer coding to set market orders to provide speed. Technology is constantly evolving to find solutions to reduce slippage, and many major brokers have built their servers near major stock markets (such as NY3 near the New York Stock Exchange) to provide better execution speeds for their traders.
Pending Orders
Pending orders allow traders to execute and fill an order at a price level different from the current market price. You can use these orders when you believe an instrument has over- or undervalued, based on your in-depth market analysis, and you anticipate a change in its price. Pending orders allow you to schedule trades to be executed at a specific price or profit level.
A trader can ask the broker to buy 100 shares of a company when its price reaches $2. If the order is effective when the stock price reaches $2, the broker will immediately execute the order and buy 100 shares at that price. If the price does not reach $2, the order will remain pending and not executed unless the trader cancels it.
Let's take a look at 4 different types of pending orders.
Stop-loss orders
Risk management is essential for every trader, and using stop-loss orders is a simple yet effective strategy for managing market risk. When you set a stop-loss order, a trade will automatically close, or "stop out," when the market reaches a specified level. This approach allows traders to control potential losses when prices move differently from their expectations.
Let's look at an example of a stop-loss order in forex trading. In this example, the EUR/USD is trading at 1.0873, meaning that 1 EUR is worth 1.0873 USD. Based on your analysis, you predict that the price will rise to 1.0973.
So you decide to buy 1 lot (€100,000), and if the price rises as expected, you'll make a profit of $1,000. If the price falls, however, you could lose more than you expected, which could result in your positions being automatically closed if you don't have enough funds in your account. To protect yourself from the risk of a reversal of your trades, you set a stop-loss order at 1.0823. This means that your broker will immediately close your trade if the price falls to this level, so you'll only exit the trade with a loss of $500 even if the price continues to decline.
Trading without a stop-loss order is considered highly risky because it puts all of the trader's funds at risk and can result in a margin call or even a complete loss of the invested funds. If you decide to trade without using a stop-loss order, be sure to consult a professional and monitor your open positions regularly.
Take Profit Orders
Take-profit orders are executed just like stop-loss orders, but they specify a price level to take your profit if the price reaches it. Take-profit orders are useful because they can help you lock in profits before price trends reverse.
Using the above example of the EURUSD pair, if the trader sets a take profit order at 1.0973 and the price moves more than he expected, the broker will close the order at that price and deposit a profit of $1,000 into the trader's account.
Take profit orders can help traders lock in profits if the price moves in the expected direction, but they also limit potential profits if the trade is closed before reaching the highest price movement in the same direction.
Trailing Stop Order
Stop-loss orders also come with an optional feature called trailing stops. When enabled, trailing stops allow your stop-loss order to be automatically adjusted as price action develops, when the price moves favorably in your trade.
For example, if you buy a single stock at $200 and set a take profit order at $240 and a stop loss order at $190, you can add a trailing stop of $20. This means that if the stock price rises to $220, the stop loss order will move to $200, maintaining the $20 difference from the current price.
If the price declines, the stop-loss order will not be adjusted downward. Trailing orders are more effective if the stock price continues to rise, as they will continue to adjust upwards and potentially secure larger profits while maintaining the pre-determined $20 spread in the event of a price reversal.
Limit Orders
This type of order allows a trader to specify a specific price at which they are willing to buy or sell a financial asset. It is useful for traders who want to enter or exit a trade at a specific price, or for those who want to seize opportunities and profit at a price they believe will be achieved in the future.
Limit orders differ in that they will only be filled at the trader's intended price or at a price that may be more favorable. While a stop order can be triggered at the intended price, it may also be filled at the current price.
There are two types of limit orders: buy limit and sell limit. A buy limit order is set below the market price, and if the market price falls to the specified price, the buy order will be executed. A sell limit order is set above the market price, and if the price rises to the specified level, the sell order will be executed.
For example, if you wanted to buy Brent crude oil when its price dropped from $80 a barrel to $70, you could place a buy limit order that tells the broker to buy 1,000 barrels when the price drops to $70. The order would remain pending until it's canceled or until the price drops to that level.
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