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Exploring Basic Trading Order Types

With the crypto markets heating up once again, this week we explore some of the basic order types that all traders should be familiar with. You can buy or sell most stocks and cryptocurrencies by using three trading basics — market, limit, and stop-loss orders.

Market Orders

A market order is a command to buy or sell an asset at the price currently available on the market, and is the most basic type of trading order. If you’re placing a trade yourself via an online platform, hitting the buy/sell button generally fulfills (executes) an order immediately.

A market buy order will execute at the nearest ask price (what someone is willing to sell for) and a market sell order will execute at the nearest bid price (what someone is willing to buy for).

Traders typically use market orders when they want to buy or sell an asset immediately, either to avoid missing a potentially profitable move or to cut their losses. Market orders guarantee that a trader will enter or exit a position as quickly as possible, but they do not guarantee a price.

Market orders are best for very liquid, frequently traded assets such as large-cap stocks, exchange-traded funds (ETFs), or well-established cryptocurrencies, which are typically bought and sold either at or close to an investor’s desired price. In contrast, market orders for traded assets that aren’t bought or sold as often may take longer to fulfill, which means that the price at execution can be far from an investor’s desired price.

Limit Orders

A limit order is a command to buy or sell an asset at a specific price — or better if possible. A buy-limit order is transacted at the limit price or lower, while a sell-limit order is executed at the limit price or higher. However, limit orders are not guaranteed to execute. A limit order will only be filled if the market price of the asset reaches the limit price. Although limit orders don’t guarantee that your order will be fulfilled, they are useful because they can ensure that you do not pay more or receive less than a specific set price.

Limit orders also are useful if you’re not in a rush or are not actively trading. For example, you can specify that you want to buy 100 shares of a particular company’s stock when its price falls to $10 USD, or lower. Or, you can place an order to sell 100 coins of a particular cryptocurrency when its price climbs higher than $10 in order to lock in profits — also called a take-profit order — after having purchased that cryptocurrency for a lesser price.

Stop-Limit Orders

In addition to regular limit orders, there are also what are known as stop-limit orders, which are more conditional and a bit more sophisticated:

• Buy Stop-Limit Order: A stop-limit order combines the characteristics of stop and limit orders and gives the trader more control over the execution of the trade, though, again, it isn’t guaranteed to be executed. A stop-limit order requires setting a stop price (the trigger price for a trade), a limit price (the execution target price of the trade), and a timeframe for execution. After the desired asset reaches the indicated stop price, the limit order is triggered, and the order is subsequently executed only when the asset price is at or better than the specified limit price.
• Sell Stop-Limit Order: A sell stop-limit order is the opposite of a buy stop-limit order. In this case, you may want to sell an asset after it moves below a certain level to minimize your risk in a trade. Unlike buy stop-limit orders, which are placed above market price at the time of the order, sell stop-limit orders are placed below market price.

Stop-Loss Orders

With a stop-loss order, you can instruct your trading platform or broker to sell a security if its price falls below a certain level, which can help guard against unexpected losses. For instance, you can program a sale of a particular company’s stock after it falls in value from your original purchase price, which would minimize your loss.

There are two main types of stop-loss orders:

• Stop-Loss Limit: With a regular stop-loss order, your trading platform or broker will automatically sell your asset once the price reaches your specified level. With a stop-loss limit order, the system will automatically convert the order to a sell when your specified stop (or trigger) price is reached, but will only sell at the limit price you specified. This type of order gives you a chance to avoid a loss if prices drop suddenly, triggering a stop-loss, but then recover quickly.
• Trailing-Stop Order: A trailing-stop order is a variation of a regular stop order. For this type of order, you’d set the trailing amount as a percentage of how much you are willing to lose. A sell trailing-stop order sets the stop price at an amount fixed below the market price with a trailing amount attached. As a price rises in the market, the stop price rises accordingly by the trailing amount. If the stock price falls, however, the stop loss price wouldn't change; instead, the order would revert to a market order once the stop price is reached.

See you next week. Onward and Upward!

Team Gemini

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