Explanation of Order Types

Posted on 16th Aug 2015
by TopShareBrokers.com team


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Explanation of Order Types

Explanation of  Order Types - India Stock Market Let's understand how is trade and order related to each other. A trade is basically made up of at least two orders viz a buy order and a sell order. Usually one order to enter the trade and one or more orders to exit the trade. Single order can be a buy order or sell order and it is used to enter or exit a market. If a trade is initiated with a buy order than it will be exited by sell order and vice versa.It is important to know how to trade and which order type is appropriate for a given situation. Traders have access to many different types of orders that they can use in various combinations to make their trades. Here I am trying to explain various order types and let you decide which order type or combination suits your trading style.

1. Market order:

A market order is the most common type of trade order. It instructs a buyer to buy shares at currently available prices rather than any particular price that you have in mind. The transaction will take place as soon as you place the order, required there are sellers available in the market.

Pros of market order:

It has surety of completing the trade. The trader can come in and out of trade using market

Cons of market order:

When you place a market order, you will never be sure of the price at which it would transact,and there is chances it can lead you to losses especially if you are an active trader.A market order does not guarantee price ,it only guarantees the execution of trade.

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2. Limit order

limit order is an order to buy or sell a stock at a specified price or better.Unlike market order, in limit order a trader has to specify a desired price to buy or sell the stock.A buy limit order can only be executed at the specified price limit or lower.Alternatively,,a sell limit order can only be executed at the specified price limit or higher.The important thing to keep in mind while placing limit order is that you have to enter a limit order to buy at or below the current bid and enter a limit order to sell at or above the current ask price.

Pros of limit order:
  • Limit order prevents you from losses.
  • Limit order allows trader to enter and exit trades with precision.
Cons of limit order
  • If the price does not fall to your desired quote then you will not get the shares.
  • It does not guarantee the execution of trade. The trade may not takes place, if there are not enough buyers or sellers even though the market has moved to your specific limit price.
Note: The limit order stays valid only till the end of the current market session. After market closes, the order is cancelled. You will have to place a new order the next day.

3. Stop Loss order (SL) or Stop Order

Stop loss order is an order to limit the losses by defining our limit past which we don’t want to risk any more money. We can protect ourselves by initially defining what would be the worst possible loss we are willing to take in any trade. As soon as the trade is executed,we can place the stop loss order in the market.Stop loss order works opposite of limit order.A buy stop order is placed above the current market price and sell stop order is placed below the current market price.A stop loss order is a passive order, to make it active, we have to set a trigger price which is a price just above the stop loss price.Its a threshold price which after crossing only the stop loss order becomes active.

Lets take a scenario here to understand it clearly:

Suppose you buy a share of infoysys at 400 with expectation that it will go to 430 in near future.But lets assume that the price starts going down. Here we can protect ourselves by taking into account how much loss we are willing to take. Lets assume the buyer don’t want to risk himself below 385.Therefore 385 is the stop loss price. To get this price active you have to set a trigger price which has to be higher than the stop loss price. We can set this to Rs.389. If the price drops to Rs.389 from 400, the stop loss order gets active.

Pros of stop loss order:
  1. With stop loss order, you can set limit of risk you are willing to take for a trade.
  2. For long positions or sell order the initial stop-loss is set below the current price,providing protection in case if market drops.
  3. For short positions or buy order the initial stop-loss is set above the trade entry in case the market rises.
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What is “trailing stop”?

A trailing stop is a stop order that can be set at a defined percentage to protect gains by enabling a trade to remain open and continue to profit as long as the price is moving in the right direction, but closing the trade if the price changes direction by a specified percentage.A trailing stop for a long position would be set below the stock’s current market price; for a short position, it would be set above the current price.


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