Order types explained, by the example [+ video]
There are several type of orders at your disposal when day trading. You don’t need to know them all. The main ones are:
• Limit orders
• Stop orders
• Market orders
• Bonus: Stop Limit orders
Long side, buy order
The first step, depending on the pattern and your approach, is to decide whether you want to “buy the dip,” that is, when the price pulls down and you buy, or whether you want to buy the breakout upward (if the price goes up, you buy)
Buy limit order (buy if the price does a pullback)
Assumption: the price per share is currently $10.50. You expect a pullback and want to buy 10 stocks for a maximum price of $10 per share. You enter a buy limit order for 10 shares with a price of $10.
When a seller reduces their asking price to $10, you become the owner of 10 shares.
Buy stop order (buy if the price breaks upward)
The buy stop order is another useful type of order. It will only be triggered if the price rises.
Now that you are the owner of 10 shares, one of two things may occur. Either the price increases, or the price decreases. Of course you want the price to increase and you want to earn a profit, but you also don’t want to lose too much and you want to sell if the price drops too low.
Sell limit order
Let’s say you want to take your profit if the price goes to $15. You enter a sell limit order for 10 shares with a price of $15. This type of order is called a “target”.
Sell stop on quote order
Let say you want to sell if the price goes down to $9. You enter a sell stop on quote order for 10 shares with a price of $9. This type of order is what we call a “stop loss”
Note: to enter these 2 orders, nous need to use an OCO order: One-Cancels-Other.
Summary:
Buy limit order = highest price you would pay
Sell limit order = lowest price you’re willing to sell for if price goes up
Sell stop order = price you’re willing to sell for if things don’t work out
Note: Any buy limit order placed above the current price will be executed immediately as a market order.
Shorting a stock
Now that you’ve mastered these kinds of orders, turn everything around. You can bet on a stock’s decline and profit by shorting it. The terminology changes a little bit. You open your trade by “selling short” and you close your trade with a “buy to cover”.
Other order types
In rare occasions, we use market orders. A market order is executed immediately at whatever price it can be filled at. We don’t recommend using market order when day trading as it can lead to a lot of slippage.
Stop limit orders are an additional option. When the spread is crucial and you don’t want to overpay in case the price climbs extremely quickly, they come in helpful.
Example: Buy 1,000 shares if price goes above $10 but not above $10.10
Note: when using stop limit orders, your order might not be filed entirely.
