Trading

Types of Orders, Stops and Limits in Trading

Learn the different ways you can open and close a position – from a simple, immediate trade to an automatic instruction to deal in your absence. Orders can help you lock in profits or guard against loss; get to know the various types and see how to use them.

ORDERS

What is an order?

An order is simply an instruction to open or close a trade. There are a number of different types of orders that you can place, depending on whether you want to trade immediately or wait for a certain price. The most basic types of orders are explained below. You can use an order to open a position straight away, or when market conditions meet your needs.

What is a Market order?

These are orders to buy or sell immediately at the best available market price.Your market order will be carried out straight away as long as the market is liquid enough, i.e. there are willing buyers and sellers. You would use this type of order if you’re happy to trade at the current market price. When an order is carried out it becomes a filled order: one that has either closed an existing position or opened a new one.

What is an Entry Order?

Entry orders can automatically open a trade for you when the market hits a certain level. You would use this type of order if you’re hoping for a particular price and don’t want to monitor the market constantly.These are sometimes called orders to open.

What is a Closing order?

These orders automatically close your existing trade when the market hits a certain price.You can use them to lock in profits if the price moves in your favour, or cap your losses if the price moves against you. These are sometimes called orders to close.

What is an Order duration?

Entry and closing orders remain ‘working’ unless your conditions are met, at which point they will become filled orders. You’ll need to decide if you want your order to remain valid indefinitely, or be cancelled after a certain amount of time.

What Does Good Till Cancelled mean?

Good till cancelled (GTC) orders remain valid until you cancel them yourself or the order is filled. On some exchanges, a GTC order may only be valid for a specified period, so it may be worth checking with your broker.

What does Good for the Day mean?

Good for the day (GFD) orders remain active until the end of the trading day on which you place the order. Check with your broker to see when your chosen market closes.

What does Good till date/time mean?

Good till date/time (GTD) orders require you to select a date and time when you want your order to be cancelled if it hasn’t been filled.

Limits

What is a limit order?

A limit is an instruction to trade if the price of a market reaches a particular level that is more favourable than the current price. The limit order level is the maximum at which you are willing to buy, or the minimum at which you will sell for. You can use a limit order either to open a new position (an entry order) or to terminate an active position (a closing order).

The main benefit of using a limit is that it saves you time and effort. You may not always be around to monitor fluctuations in the market and act immediately, so you can use a limit to deal automatically for you. Limits will always be filled at your chosen price, or sometimes at a slightly better price if one is available at the moment your order is filled.

What is a Limit entry order?

This is an order to open a position by buying when the market hits a lower level than the current price, or selling short when the market hits a higher level than the current price. This is suitable if you think the market price will change direction when it hits a certain level. For example, if you use charts as a tool to help your trading, your analysis might suggest buying a share, index or commodity if the price drops to a level that’s been identified as significant.

Take a look at the example below for details on how limit entry orders work.

EXAMPLE: GBP/USD LIMIT TO OPEN

GBP/USD is currently trading at 1.6050. Chart analysis shows 1.6070 is a key resistance level; if the market reaches this level it’s likely to then decline. You decide to sell GBP/USD if it reaches 1.6070, so you place a limit order to open at this level. Two hours later, the market does indeed hit 1.6070. Your broker automatically carries out your sell order and opens your trade. If GBP/USD falls as you expected, you’ll make a profit. If it continues to rise, however, you’ll suffer a loss.

What is a limit closing order?

This is an order to close a long position when the market hits a higher level than the current price, or close a short position when the market hits a lower level. For example, let’s say you have a long position that’s currently in profit. If you have a target level at which you’d be happy to collect your gains, you can set a limit to close out your position when and if this level is met. You may then avoid the risk of a subsequent change in market direction wiping out your profit.

Take a look at the example below for details on how limit closing orders work.

EXAMPLE: BARCLAYS LIMIT TO CLOSE

You own shares in Barclays, currently trading at 300p. Later, you see the price has risen to 310p. You’re not tempted to sell yet, as you think the market will keep rising. However, you don’t want to lose your profit if the market rises and then falls again. You think there might be a line of resistance above 320p, which could reverse the upward trend. In case you’re right and there is resistance, you set a limit to close your trade if the price of Barclays reaches 320p. Later, the market rises to 325p. As it passes 320p, your limit order is triggered. Your broker closes your trade, at or just above 320p.

STOPS

What is a stop order?

A stop is an instruction to trade when the price of a market reaches a particular level that is less favourable than the current price. So this means buying if the market hits a specified higher price, or selling if it hits a specified lower price. You may wonder why you would want to trade at a worse price, but there are actually plenty of reasons why it can be a good idea. For example, chart analysis might suggest that the price of an asset might keep rising if it breaks through a certain higher level. Or, you might want to use a stop to close out a trade that’s moving against you.

Like limits, stops save you time and effort by reducing the need to monitor the market. You can use one either to open a new position (an entry order) or to terminate an active position (a closing order).

What is a Stop entry order?

This is an order to buy when the market hits a higher level than the current price, or sell when the market hits a lower level than the current price. This is suitable if you think the market will continue moving in the same direction once it hits a certain level. For instance, if you use charts to help you trade you might want to open a position if the market passes a level that you’ve identified as significant.

Take a look at the example below for details on how stop entry orders work.

EXAMPLE: SILVER STOP TO OPEN

Silver is currently trading at $35. Chart analysis shows that $35.50 is a significant level for this market, suggesting that if it bursts through this level it will keep moving upwards.You decide to buy silver if it reaches $35.80, as this will mean it has clearly broken through the $35.50 level. You place a stop order to open at this level. Two hours later, the market rises to $35.85, so your broker automatically executes your stop order and opens your trade at $35.80.

What is a Stop closing order?

This is an order to close an open order by selling when the market hits a lower level, or buying when the market hits a higher level. This type of order is known as a stop-loss and is commonly used to close out a position at a predetermined level, effectively restricting the amount of money you could lose. Adding a stop-loss means your position will be closed if the market moves too far against you. Set the stop at the point beyond which the level of loss would be unacceptable to you.

Take a look at the example below for details on how stop closing orders work.

EXAMPLE: BHP BILLITON STOP TO CLOSE

You own 100 shares in BHP Billiton Ltd, bought at an individual price of A$37. Some disappointing half-year results cause the share price to decline. While you hope the price won’t keep falling, if it does you don’t want to risk losing too much. As such, you place an order to sell the stock if the price drops to A$32. The price continues to decline, and passes A$32, where your stop-loss is carried out. You’ve lost A$500 (100 x A$5) on your shares, but if the price kept falling you would stand to lose substantially more.

STOP-LOSSES

Stop-losses are usually provided free of charge. However, as this type of stop is not guaranteed, your trade could be closed at a worse level than the one you specified if the market moves very quickly. This is called slippage.

GUARANTEED STOP-LOSSES

If you are spread betting (UK only) or trading CFDs, you can put an absolute cap on your risk by attaching a guaranteed stop to your position. This ensures that your stop will take effect at the exact level you have chosen; there will be no slippage, even if the price changes suddenly. There is likely to be an extra charge for this protection.

 

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