As a trader, you may come upon various order types that you can use in different financial markets. You’d probably settle for just a few order types in your own trading, but being well-informed with a full arsenal of trading tools is never a bad idea!
Most importantly, knowing different types of orders will help you greatly in your risk exposure handling as some of these orders are essential to your risk management strategies. Let’s go through some of the most common order types together:
Market orders allow you to buy or sell your assets at the current market price and are executed as fast as possible. For example, you want to buy some Bitcoin at $30k, the current market price. All you need to do is place a market order with the amount you want to buy.
With limit orders, you aim for a specific price to sell or buy your assets at. In other words, your order gets executed once your desired price or a better one is available in the market.
Let’s say Bitcoin is trading at $30k; You believe that it would drop to $27k which is a good place to buy. You can simply place a limit order at $27k to buy your desired amount of Bitcoin.
You can use a Stop-Limit order as a way to protect your funds. A Stop-Limit order activates a limit order once the stop price is reached.
Let’s assume that you buy some Bitcoin at $30k as you’d expect the price to increase. But considering the highly volatile nature of the crypto market, you have to consider a scenario in which the market goes against your predicted direction.
To minimize your potential loss, you decide to place a Stop-Limit order with $28.5k as the stop price and $28k as the limit price. Once the market price reaches $28.5k, a limit order will be placed in the market to sell your Bitcoins at $28k and prevent any further loss.
A stop-loss order is similar to a stop-limit order in which the stop price and the limit price are the same. In other words, once the market price reaches the stop price, the order is triggered and executed.
Take-profit orders are a type of limit orders which you can use to make sure that you’d realize your desired profits. Let’s go back to our Bitcoin example where you bought some bitcoin, believing that its price would increase in the near future.
To make sure you don’t miss out on the profits, you decide to place a take-profit order at $34k. Once the price reaches $34k, your order gets executed.
A trailing stop is the more advanced version of a stop order in which you define a percentage for your potential loss.
Consider our Bitcoin example again: you’re convinced that Bitcoin will appreciate in value after a 10% pullback but any drop that exceeds 10% could invalidate your assumptions.
One way to deal with this is to set a trailing stop of 10% which will be triggered only if the market price drops below $27k which is more than 10% of your entry price.
It’s a type of limit order that only lasts until the end of the trading day. In other words, if the order is not filled by the end of the day, it will be canceled by the broker.
Good ‘Til Canceled (GTC) is an alternative to the day orders which will be active until getting executed or canceled directly by you.
Day orders are more applicable to the traditional markets which have specific working hours.
Immediate or Cancel (IOC) orders are mainly used for large orders where you aim for a specific price. For example, you want to buy 500 shares of Tesla but only 100 shares are available at your desired price. The IOC will fill the 100 shares immediately and cancel the remaining 400.
Unlike IOC, a Fill or Kill order will either execute the order completely or cancel it altogether. In our Tesla example, the order would be filled only if there are 500 shares available in the market all at once.
In general, a One-Cancels-the-Other (OCO) order consists of a limit order and a stop-loss order, only one of which will have a chance to be filled.
Let’s say based on your analytics, you’ve decided to sell your Bitcoins at $34k to take profits. You’ve also selected $27k as your stop-loss point where you sell your coins to avoid further loss.
In this situation, you can place the limit order and the stop-loss order at $34k and $27k respectively. If the price increases from $30k and reaches $34k, the limit order will be executed and the stop-loss order will get canceled. On the other hand, if the price drops, the stop-loss order will be filled, canceling the other order
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