Trading is not as simple as only clicking on “sell” and “buy” buttons. In fact, there are multiple order types you should know about as they can have a great influence on your future. To be fair, you can still just choose to do it the simple way, but that’s both unsafe and inefficient. You will want to have a protective stop-loss order and you will want to avoid any slippage losses.
1. Long and Short Trade
Before we start with the rest of them, we need to cover the difference between long and short trades. The standard trade would be the long one. That means that you are expecting to gain from the rising prices of the market. To put it as simply as possible, you buy low and want to sell high. This is considered to be relatively safe. After all, you cannot lose more than you invested as the stock cannot drop under $0.
On the other hand, we have the short trade. It is a bit more complicated, but it is a way to make money if you expect shares to go down. You do so by borrowing securities and selling them immediately. Then, once the price goes down, buy them back at a lower cost and walk away with the profit. Unlike the long sale, short sales can be rather risky. Since you do not owe the money, but rather the stock itself, the price rise could cost you a lot. In theory, there is no limit to the possible loss if the stocks keep going up. For that reason, you should use a stop-loss order to stop the losses from going too high.
2. Market Order
To make a market order, an investor will go through a brokerage service to immediately trade an investment. Of course, he will do so at the best available price. With the market order’s execution guarantees, the commission is usually low. However, it doesn’t have price limitations so you might be at risk of slippage or a wide spread. For those who do not know, the spread is the difference between the bid and the ask. With market orders, you are accepting the ask for buying or the bid for selling. The good side is that it is a quick and a surefire way to get in or out of a trade.
3. Limit Order
These orders allow for you to set a price at which to sell or buy. While this type of order will protect you from slippage it does have a downside. There is a chance for the trade not to happen. This can happen for two reasons. Either the limit was never met, or the limit was met, but there was simply no one selling or buying that stock at the moment.
4. Stop Order
A stop order is very similar to the limit order. However, it works a bit inversely. If you already have stock that is within the profit margin the stop order is there to make sure you keep it. Once the order hits the stop level it will immediately become a market or limit order and protect your profit.
The trailing stop order is there to follow the movement of the price and keep the trade open while it is moving in the right direction, or close it once it goes the opposite way.
The most common use of a stop order is loss prevention.
5. Conditional Order
Once you get a grasp on orders you will probably want to use conditional orders. They allow you to set certain criteria that will proc the sending or cancellation of the order. With this order, you can customize everything to suit your exact desires.