What Are The Different Stock Order Types

Moving on…

Let's talk about the different types of orders in the stock market.

The different types of orders

When you are trading stocks there are different types of orders that you can use in the market.

And I just want to share with you some of the most common ones:

  • Market order
  • Limit order
  • Stop order
  • Stop loss order

There is more to these four that I'm about to share with you, but I'm not going to cover all of them.

But these are the four most popular ones that I feel you should know.

Now, let me explain…

Market order

What is it?

It is simply an order that sends and executes to the market right immediately.

Whatever the prevailing ask price is, you will buy right now.

Pros:

The good thing about market orders is that, for sure that you'll be in the trade.

Just hit the market order and the broker would send the order to the exchange and get you the best possible price.

Cons:

The downside to it is that you have to pay a premium because you are willing to pay whatever the current prevailing price is.

So if the stock is moving pretty fast, you might have to pay a slightly higher premium.

Next is what we call the…

Limit Order

You only enter the market if the price comes to your desired level.

Let’s say, the market is trading higher.

You don't want to go long at the current price.

You think it's too overbought, it's too high.

So instead, you want to buy at a lower price!

What you can do is you can put in a limit order at a lower or desired price.

If the market does come back lower and hit your lower price level, you will be filled on your trade.

This is what I mean by entering only if the market comes to your desired level, so you are trading with pullbacks.

The pros are that you will be entering your trade at a cheaper price and this would naturally improve your risk to reward.

The downside to this is that you might miss the move because the market doesn't necessarily have to come to the level that you are waiting for and you might miss the move!

The second thing is that you are trading against the current momentum.

What this means is that if the market is trading higher, you place a limit order, it comes back down.

You're basically entering the current momentum that is against you.

Of course, there are ways to circumvent this…

You could wait for a reversal candlestick pattern before the market does a higher close and then you enter the trade.

Here are the Pros and Cons:

Pros: Enter at a “cheaper” price.

Cons: Might miss the move and trading against current momentum.

Keep reading…

Stop Order

This simply means that you only enter the trade if the market moves in your favor.

For example, the market could be in a range.

You want to trade the breakout of the range.

What you can do is that you can put a buy stop order at the breakout price (above current price).

So that if the market trades and hit this level, only then will you be filled on the trade to go long.

Here are the Pros and Cons:

Pros: Enter trades with momentum.

Cons: It might be a false breakout.

And finally…

Stop Loss Order

This type of order is slightly different from the earlier orders.

Because the earlier three orders are orders to get you into a trade, an entry.

Whereas a stop-loss order is to get you out of the trade.

It's an exit.

Let's say, you buy at support in anticipation the market will to continue trading higher and you have a stop loss order below support.

But what happens is that the market collapses lower.

If it hits your stop-loss level, you will be out of the trade for a loss.

This limits your downside.

Imagine if the market collapses all the way lower and you don't have a stop loss.

Your initial loss could have been bigger.

So, a stop loss order is simply a defensive mechanism to protect your capital if the market goes against you.

Cutting your losses means that you live to fight another day.

You don't blow up your entire trading account, and like I've said, it's a defensive measure.

The bad side is that the market could reverse back in your intended direction.

But I would rather get stopped out of my trade and get a small ant bite than get a big crocodile bite.

Here are the Pros and Cons:

Pros: Cut your losses by not blowing your entire account.

Cons: The market could reverse back in your direction.

With that said, let’s do quick summary…

Summary

  • A market order is where you enter the trade right now
  • A limit order is where you want to enter at a cheaper price
  • A Stop order is where you want to enter at a higher price (breakouts)
  • A Stop-Loss order gets you out of your losing trade and protects your capital
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