Do you know what kind of orders exist, when and how to use them? A basic part of trading is learning how to execute the right orders and knowing what role each one plays in your success. In this post we will see the three basic types of orders a trader can place when buying or selling securities; and how to get the most out of them. The most common orders are:
- market orders: are the orders that are sent without a purchase or sale price.
- limit orders: They are used when you want to secure a maximum (buy) or minimum (sell) execution price.
- Stop Loss Orders: they aim to limit losses by closing the trade once the predetermined price has been reached.
Before executing an order, it is important to analyze the
Bid-ask spread
of a security to determine its liquidity and risk. The price at which a security is currently selling is called the Ask price. The highest price anyone is willing to pay for a security is known as the Bid price. The difference between the Ask and Bid prices is the Spread.
The value of the spread It’s in pips either “point percentage”, which is 1/100 of 1% or one basis point. Companies with low trading volumes tend to have wider spreads due to less liquidity. On the other hand, companies with high trading volumes will have smaller spreads due to increased competition. The risk with wider spreads is that if you suddenly need to sell a security, you could incur a loss.
Now that you know how to determine the validity of a security and its immediate risk, we are going to explain the three most common orders that a trader can make: market orders they allow you to buy or sell at the next available price and are usually executed immediately. A market order offers no price guarantee and can often be filled at a price very different from the current real-time Bid/Ask price or last traded price. limit orders are one of the most common types of orders. They allow a trader to specify the price at which to buy or sell a security. A buy can only be executed at or below the specified price, while a sell can only be executed at or above the specified price. The downside of limit orders is that there is no guarantee of execution.
Stop Loss Orders they allow a trader to protect his investments by executing a purchase or sale of securities by specifying a “stop price”.
Buy-Stop orders are placed above the market price, while Sell-Stop orders are placed below to limit the loss. It is important to note that a stop price is not a guaranteed price but rather a trigger at which a market order will be executed.