Whether you are a day trader, swing trader or active investor you must know the basics of order entry and order types. So let’s go over some fundamental basics. There are four order types that are most prevalent for traders:
This is the most basic of all. You simply pay what the market is offering in a given stock at the time you buy or sell. For example: If the bid for stock in XYZ is 5.05 and the ask is 5.07 then you will pay 5.07 to buy that stock or you will get 5.05 if you are selling the stock.
A limit order is similar to a market order, but with restrictions. Basically you are saying I want to purchase XYZ stock for no more than 5.06 for example. When entering this you will put 5.06 as your buy price and the order will only get filled at that price or lower. On the flipside if you are selling the position and put in a limit order of 5.08 then it will not be filled until XYZ reaches that price and a buyer is available.
A stop order is an order that triggers based on criteria you specify, usually price. So let’s say you own XYZ stock at 5.07 and if it were to fall under 5.00 you want to automatically exit the position. What we would do is put in a stop order to sell at 4.99. If the stock touches that price then it would trigger and we would be sold out of the stock.
Stop Limit Order:
A stop limit takes the stop order further by limiting the price you sell XYZ. Using the previous example of the stop where we have placed our order to sell if the stock touches 4.99. The difference is once the order is triggered the position will only be sold at 4.99 or better. So if the stock were to push through 4.99 quickly and the best bid is now 4.98 then your order would not execute because it is below the limit price.
These are just basic examples so you have a understanding. For examples on how to handle these situations and the correct order types to use along with information on the bid-ask and level 2 quotes check out the Active Trading Blueprint!
Remember, Victory Loves Preparation!