Investing in the stock market: Types of orders

INVESTING IN THE STOCK MARKET: TYPES OF ORDERS

One of the most important aspects, at the time of filling in the “Trading Slip,” is to select the types of orders correctly. If a mistake is made, the order could be executed at undesired levels or even rejected by the system.

It is important to emphasize that the order types, despite having the same name, will not be used in the same way in Long and Short positions, being inverse to each other, as we will see below.

The types of orders can be divided into 3, namely: Limit, Market, and Stop.

Limit
- Buy Limit: this type of order will be used when the investor wants to buy at prices lower than the current ones, i.e., the client stipulates the maximum price at which he is willing to buy, only executing the order if a counterpart is found at prices equal to or lower (better for the client) than what is established in the Ballot. As an example, purchases at supports or trend lines.
- Sell Limit: when we sell, either a previously bought position or the bearish entry in some asset, the limit order type will be used when the investor wants to sell at prices higher than the current ones; that is, the order will only be executed when a counterparty is found at prices equal to or higher than those established in the Ballot. For example, sales for profit taking or bearish entries in downward trends or resistances are not expected to be overcome.

Market: this is perhaps the simplest type of order since, for both purchases and sales, it is the immediate execution at the prices at which the traded asset is currently quoted.

Stop
- Buy Stop: the Stop order type will be used when the client wants to buy at prices higher than the current ones. The order will only be executed when the market trades at a price equal to or higher than the price indicated in the ticket. Once the market marks prices equal or higher, this type of order is changed to the Market type to ensure a faster execution. As an example, it is used to buy only if the price breaks a resistance.
- Sell Stop: if it is a sell order, the client must use this type of order to sell when the asset price is lower than the current quoted price. In the same way that happens in the purchase, when the market marks prices equal to or lower than those established by the investor, the sell order will jump to the market and will be executed immediately at the best prices that the market has. As an example, its use is the well-known “Stop Loss” or the stop loss as soon as the price goes below a certain level. In bearish positions, it is usually used for entries on losses of support or lows.

Within the Stop order type, two small subgroups can be created:

Stop Limit
- Buy Stop Limit: it is the same as a buy Stop type, but with a maximum range of action, that is to say, a limitation on the upper part. Thus, with this type of order, we can indicate to the system to execute the purchase of an asset when the price rises above a certain level but not higher than a price set by the investor. If the system finds a counterparty within the price range indicated by the investor, the order will be executed, if no counterparty is found, either by market gaps or lack of market liquidity, the order will remain pending as a buy limit, for when the price goes below the maximum limit set by the investor.
- Stop Limit Sell: the same as the Stop Sale, but giving the range of action from the price set by the client downwards. It should be taken into account that, if this type of order is used to stop a loss, it is not the most efficient option, since if no counterpart is found in the given range and the price continues to fall, the losses of the position will continue to grow.

Trailing Stop
Purchase Stop Moving Stop: in this type of order, the client will have to establish the purchase price and mobility for it. The price of the order will move according to the mobility in case the price goes in the opposite direction to the price. That is to say, if once the purchase order has been established, at a price higher than the current price, the price of the company starts to go down, the price of the order will go down according to the mobility indicated by the client.
- Sell Trailing Stop: as in the previous case, if after establishing an order to sell at a lower price than the current one, the price of the stock increases, the price of the sell order will go up, being updated according to the mobility indicated in the bowling alley. This order is used in the so-called "Trailing Stop

In addition to these types of orders, it is also worth mentioning the so-called OCO orders, which stands for “One Cancel the Other,” i.e., one cancels the other.

The OCO orders join two of the orders seen above. When setting an OCO order, either in buy or sell, we will set a Limit order and a Stop order for the same amount of shares. When one of them fulfills the condition, it will be executed, and the system will automatically cancel the other one.

We must make the small warning that establishing any of the orders does not indicate that the order must be executed only and exclusively to the indicated price, being the execution subject to the volume or the market conditions. In illiquid securities, or when there are gaps in the price of an asset, the prices at which orders can be executed may differ greatly from the price set by the investor.

The article is prepared by professional brokers from https://dotbig.com/.