Trading: order types
Dear Friends of Mr Banca , in this section we will provide you with a simplified guide that will explain you in detail what types of orders you can use in trading.
What is a Trading Order?
In Trading an order is used to instruct the broker to open or close a position. Said in this way may seem very trivial: press the “buy” button when the entry conditions are met or press the “sell” button when it is time to exit a position. Although it is possible to operate in this simplified manner, Mr Banca’s advice is not to use it because it requires constant monitoring and exposes you to unnecessary financial risks.
Traders who mainly use the “buy” and “sell” may incur, in the absence of an order of stop-loss, in high losses due to a strong market exposure. In rapidly changing markets, in fact, the difference between the desired price and the price at which the order is actually closed (in English slippage ) can be significant and can make the difference between a winning negotiation and a losing one.
Modern trading platforms allow traders to use a multitude of order types in order to add more protection to their trading methodology. Knowing when to trade a position is only part of trading . The real Trader must also have in mind how to do Trading!
Mr. Banca is still here for you to explain to you what orders you can use in order to minimize the risks associated with “slippage”.
Market order (market order)
A market order is a purchase order at the current market price. It is the simplest of the available order types, it simply instructs the Broker to sell or buy immediately following the “buy” or “sell” instruction.
The operation is very simple:
When using a market order , it is almost guaranteed that your order will be executed. When instructing the broker saying: “to buy 100 shares of Mr Banca Corporation” the broker will buy with a market order the shares requested at the price exchanged when at the time of the subscription of the order itself.
It must be taken into consideration that the purchase price could be different from the one quoted at the time the instruction was sent, the market could, in fact, move very quickly in a very short period of time.
It is easy to understand that the use of this tool is particularly risky in volatile markets where your purchase order could be placed at a much higher price than when you thought of buying. Similarly, the “buy” order could be executed at a price well below what you expected.
Limit type orders allow you to set a price at which you want to buy or sell a security. Unlike market orders, the purchase or sale will only be finalized when the price reaches the specified level.
By using limit orders, you can protect yourself from buying a security at too high a price or from selling at too low a price.
It should be considered that if the security price never reaches your limit price, no action will be taken. Attention: some brokers apply higher rates (percentage due for the transaction) for a limit order compared to market orders .
Also in this case the operation is very simple:
Suppose you want to buy Mr Bank Corporation securities for € 100. The securities are currently traded for € 105, so you can set a limit order to buy at the desired price (€ 100). At this point the price may increase or decrease, but as soon as the security reaches the set value, the order will be activated and the negotiation will be finalized.
If we say then to sell for € 102 it is necessary to make a new limit order and wait for the security to reach the desired value so as to be able to finalize the sale at the set value. In volatile markets, unlike market orders, limit orders are recommended as there is direct control over the sale and purchase price.
Stop-loss order (stop-loss order)
A stop-loss order has the advantage of becoming active only when a price threshold has been reached (defined as a “stop level” ).
Stop-loss orders are designed precisely to limit an investor’s losses. Most investors associate stop-loss orders generally when they open a long position.
With a stop-loss order for a long (long) position, the trigger for the sale is triggered when the share price falls below a predetermined threshold, the underlying will be sold at the next available market price. This type of order works well if the stock or market suffers a downturn (decline) ordered but not if this downturn is hysterical and / or disordered.
This order can be clearly used even in the case of opening a short type position, in the latter case it prevents the underlying from trading above a predefined price.
In this sense, a stop-loss order acts as a trigger for the market order or limit order .
On this issue we advise you to also read the section on risks associated with CFDs, where we have also highlighted the flaws in the use of stop-loss orders.
Conditional orders are advanced tools that allow investors to combine two or three criteria which, if satisfied, will proceed to cancel or trigger further orders. To try to simplify, conditional orders are a combination of se-then.
“Only if it happens what I expect then I will proceed with the new strategy …”
Below are three types of advanced conditional orders among the most common:
- Order “One cancels another” (OCA, in Italian “one cancels the other”)
In this case two orders are signed simultaneously. If one is satisfied the other is automatically canceled. This way you are simply saying that you want to buy one of the two titles but not both. With the OCA order this is possible because the fulfillment of the A-buying criterion will automatically cancel the order to purchase of the B title.
- Order “One triggers another” (OTA, in Italian “one triggers the other”)
If the first criterion is satisfied, it automatically sends the next order. You are in possession of shares and would like to buy shares of the title B using only the money from the sale of the shares of the title A. With the OTA order we can set a sale price of Asset A and proceed with the purchase of the title actions B only if the first criterion is satisfied.
- Order “ne triggers two” (OTT, in Italian “uno innesca due”)
If the first criterion is satisfied, the next two orders are sent automatically. You are in possession of shares of title A worth € 40 and are concerned that their value may fall below € 38. You would also like to buy B shares at a price of € 35 and place a stop-loss order for B at € 30. With the OTT order, the A shares would be sold as soon as the € 38 threshold was reached. This action would then trigger the next two orders: purchase of B shares at € 35 and insertion of a stop-loss order at € 30.
The three illustrated cases therefore make it possible to carry out financial maneuvers in a more secure and conscious way. There are also further advanced combinations of conditional orders , an example below:
- OT (One trigger) / OCA : An order triggers an order When an order is sent and it is signed, two further orders are sent simultaneously. If an order from the second series is executed, the other one is automatically canceled.
- OT (One trigger) / OTA : An order triggers an order When you place an order and it is signed, another order is subsequently sent. If this last order is executed a third order will subsequently be inscribed.
- OT / OTT (One trigger): An order triggers an order If a proposal is executed, two further orders are sent automatically and simultaneously.
Mr Banca’s advice is to always check with your broker how these types of advanced orders are considered. Unfortunately there are no stand-by specifications, so always pay close attention!
Duration of orders
For all the orders listed above it is always possible to specify a duration. By this we mean that the trader has the faculty to establish how long the instruction must remain active before being automatically canceled.
By default, almost all trading platforms keep education on for the duration of the daily trading session. At the end of the session the instruction will expire automatically.