Before talking about money management and risk management, we should mention the types of orders that exist and their uses in order to understand some concepts that we will see later.
Brokers have several types of orders to enter and exit a trade, some have their own, so we will only mention the most used ones. There is no one order better than another, all are useful depending on the interests and objectives we have for each operation.
Different Types of orders for stock trading
Market order:
Is an order to buy or sell as quickly as possible a financial instrument at the current market price. This type of order guarantees the purchase or sale, as it is immediate. What it does not guarantee is the price, as it is the price that is available at that moment and can vary in a matter of seconds, especially on very volatile days. Generally, the purchase is made at the bid price (Ask), while the sale is made at the ask price (Bid).
Limit order:
An order to buy or sell a financial instrument at a specific price, usually used to buy or sell shares. This type of order does not guarantee the purchase or sale, as the broker will only buy or sell when the price reaches the value specified in the order. Thus, it will be executed at a price equal to or better than the price that has been set, provided that there is supply and demand. It may be executed at a lower price (in the case of a buy order) or a higher price (in the case of a sell order) than the price set if it is executed at the time it is placed.
There are different types of orders:
Buy Limit:
Used to buy at the “Ask” price equal to or lower than that specified in the order, because in this case the current price is higher than the value specified in the order.
Buy Stop:
Used to buy at the “Ask” price equal to or higher than the one specified in the order, because in this case the current price is lower than the value specified in the order.
Sell Limit:
Used to sell at the “Bid” price equal to or higher than the one specified in the order, because in this case the current price is lower than the value specified in the order.
Sell Stop:
Is used to sell at the “Bid” price equal to lower than the one specified in the order, because in this case the current price is higher than the value specified in the order.
Buy Stop Limit:
Is the combination of a stop order with a Buy Limit order.
Sell Stop Limit:
A stop order to place a sell limit order (“Sell Limit”).
Stop Loss and Take Profit order:
Stop loss and take profit orders are used to protect the trade, preserving our capital (stop loss), and taking profits if we reach our targets (take profit). The Take Profit order, which is executed when the price of the financial instrument has reached the level we specify, performs the complete closing of the position.
Stop losses can be sent in two ways:
- Send it after sending our main order (therefore, they end up being two orders).
- Send it at the same time we send the buy or sell order. This is possible with most brokers and platforms, but you should make sure that this is the case.
Triling Stop order:
This is a stop order that follows the evolution of the price. If the price goes the way we want, the stop loss will move automatically with the price movements, at a distance that we have previously decided and placed in the order. Its function is to protect part of the profits already accumulated in a winning operation.
When we place an order, in addition to choosing the type of order, we must choose its duration or when we want it to be executed. There are several options:
Day order:
Means day order, so it expires at the end of the current session. If it is not executed, the order is automatically cancelled.
GTC Order (Good Til Cancelled):
This order will be active in the market until it is executed (if it is not executed today, it may be executed tomorrow or the day after) or until the trader cancels it. Generally, brokers automatically cancel them if they have not been executed within 30 to 90 days.
GTD (Good Til Date) order:
This order will remain active in the market until a specific date that we select. The order will be active until it is executed or until it is cancelled.
ATC order (At the Close):
This order is executed at the price closest to the market close.
ATC order (At the opening):
This order is executed at the opening of the market, it does the opposite of ATC orders. If it is not executed, for any reason, at the opening of the market, the order is automatically cancelled.
IOC order (Immediate or cancel):
This order is one where all or part of the order is executed immediately. If it is not executed, the order or the unexecuted part of it is automatically cancelled.
AON order (All or non):
This order is executed in its entirety or not executed, partial executions are not allowed.
FOK order (Fill or kill):
This order is executed in full but immediately, it cannot be left pending.
The type of order and its duration must be chosen by you and will depend on three things:
- Where the price is located.
- Where we want to execute the trade.
- Whether we want to go long (up) or short (down) on the trade.
Long vs Short Trading
Long (buy/bullish)
1. Above the current price (Buy stop – Conditional order)
If our objective is to buy above the current price, then the entry should be with a conditional buy stop, the stop loss a conditional sell stop and the take profit a sell limit.
2. Below the current price (limit order)
If our objective is to buy below where the price is currently at, the entry should then be with a buy limit order, the stop loss a sell limit and the take profit a sell limit.
Short (sell/bottom)
1. Below the current price (Sell stop – Conditional order)
If our objective is to sell below where the price is at the moment, the entry should then be with a sell stop conditional sell order, the stop loss a buy stop conditional buy stop and the take profit a buy limit.
2. Above the current price (limit order)
If our objective is to sell above the current price, then the entry should be with a sell limit order, the stop loss a conditional buy stop and the take profit a buy stop and the take profit a buy limit.
