Stock trading involves various stock order types. They are limit order, market order and stop loss order to name the most important ones.
Having knowledge of these orders helps you avoid unwanted losses in stock trading. Moreover, they also help you in trade management when you have entered a trade.
Be it a day trading or intraday trading, cash trading or futures and options trading, knowing the stock order types is very important to a trader.
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Let us know the different stock order types you come across while trading in the stock markets.
Table of Contents
A market order is a type of order placed to buy or sell stocks at the current market price available for any stock. This is useful when you just want to enter or exit the market quickly at whatever available price to you.
For market order, you do not have to wait for the order to get executed. It is executed as soon as you place the order.
The stock prices keep on changing every moment. So, the market order may get executed at a price different than what you saw when you placed the market order. This is because of the time taken to place the market order.
Suppose, a stock is trading at ₹ 500. You just want to buy it or want to exit it if you are already holding it with no specific price in your mind. For this, you can place a market order and the order will be executed immediately.
Market orders can be placed only when the stock market is open. You can not place market order when the stock market is shut.
Furthermore, market order can not be modified or canceled after you placed it unlike a limit order.
Limit order is used when we want to buy or sell a stock at a particular price level for a stock. Here, we place our order and we have to wait for it to get executed. It will be executed only when the current stock prices visit the price at which we placed the order.
The limit order may get executed or may not get executed. It depends upon whether the stock prices visit that price.
The orders not executed till the end of the trading session will expire. You have to place fresh limit order if you still want to buy or sell that stock after order expiry.
However, it is important to know that a limit order becomes market order if you place the limit order above the current market price for a buy limit order or below the current market price for the sell limit order. In this case, your order will be executed immediately.
Take the above example again – If you want to buy the stock at only ₹ 495, you can place buy limit order at 495. It will be executed at only 495 price level. If you place buy limit order at 505, the order will be executed immediately at 500.
Same is for sell order. If you want to sell the stock at 505, you can place sell limit order there. However if you place sell limit order at 495, it will be executed immediately at 500.
An order is always executed at best possible price available in the market. Another advantage with limit order is that you can always modify or cancel your order till it is in pending state or not executed.
You should always prefer a limit order for your trading. Market orders should be rarely used unless urgently needed.
Stop Loss Order
Stop loss order is an order to stop your losses in the stock trading. You can use stop loss order to initiate a trade as well as after you have entered a trade and also as a trailing stop loss.
Stop Loss Order To Enter A Trade – Stop loss order is useful here to get an entry into trade above a resistance level for a buy order and below a support level to enter a short trade or for short selling.
Stop Loss Order After Entry – You can fix a price level based on your technical analysis or research or arbitrarily up to which you can bear maximum loss. Beyond that, this order is executed and your losses are limited.
Stop loss Order as a Trailing Stop Loss – A trailing stop loss order is very useful in case of a profitable trades. There are times when your trade is in profits and you are in dilemma. Dilemma is if you should take your profits or give some more time to add more profits. But staying in the market is always risky and you may loose your profits also.
Here you can employ the trailing stop loss to protect your profits. With trailing stop loss, you can lock in your profits by moving your stop loss higher incrementally as the stock moves in your desired direction. Anytime stock reverses, your stop loss is triggered and you get your profits in your bank account.
Take the above example to understand the stop loss order –
You bought the stocks at ₹ 500. You decided to exit the trade if the stock slips below ₹ 490. You can place a stop loss order at 490. Then the system asks you to place a limit order too which you can place anywhere below 490, say 487 or 485 or any price. If the stock price falls to 490, the order will be triggered at 490 and executed anywhere between 490 and the limit price depending upon the availability of required price.
On the other hand, if you are short selling the stock at 500, you can place the stop loss order at 505 and limit order at, say, 510 or 508. The order will be triggered if the prices start moving higher above 500 to 505. In short selling, you run into losses when the stock prices rise above your selling price.
Now as for using stop loss order to enter a trade, you have two types of trades. Long trade (buy trade / long trade) or short trade (short selling).
For a long trade, you should buy a stock above the support level. Suppose the above stock trading at ₹ 500 has a resistance at ₹ 505. There is no meaning of buying the stock below the resistance level. You want entry after the stock breaks the resistance and start trading above it. After that, the resistance becomes support for the stock.
So, you can place a buy order with a stop loss order at, say, anywhere around 505-510. Your limit order will be above stop loss order, possibly around 510-515.
For a short trade, say for above example, the stock is trading at 500 with a support at ₹ 490. After breaking support, the stock becomes weak and may fall further. So, you can place stop loss order at, say, ₹ 485 for short selling. You limit order for this trade would be still below ₹ 485, say, at ₹ 480.
It is important that we make a habit of using stop loss order in each trade. This brings a discipline in your trading. If your stop loss order is triggered, never renter that trade. You can pile up losses otherwise.
Stop Limit Order
Stop limit order is placed to buy a stock in between a particular price range. When you are ready to buy a stock only in a particular price range, neither below it and nor above it, you can use a stop limit order.
Say, a stock is trading at 495 and you want to buy if the stock moves to 500 but not if it moves above 505. So, you can place an order at 500 and 505 which will be executed when the prices are between those levels. If price up move is very sharp and stock jumps to above 505, the order will not be executed.
Valid Till Cancel Order
This is another type of limit order. This is variant only provided by the stock brokers.
With valid till cancel (VTC) order, you can place a limit buy order to buy stocks on price of your choice. This is a time based order which remains valid till it is executed or its validity expires.
You can fix a time limit, say, 15 days to buy a stock. If the order is not executed on a day, the order expires and system places the same order next day before market opens. Thus, you don’t need to place the order again and again if it is not executed.
This is really useful to traders who do not have enough time to daily login to their trading account and place fresh limit buy order for a stock.
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Learn Various Stock Order Types - Limit Order : Market Order : Stop Loss Order
Stock trading involves various stock order types. They are limit order, market order and stop loss order to name the most important ones. Having knowledge