For investors and traders who wish to place their own trades in the market, it is important to have a solid understanding of the different order types and how to use them. A stock price has three important components: last trade, bid price and ask price. The last trade is the most recent price the stock has traded and therefore the current price. The bid price is what the market is willing to buy your shares at if you wish to sell immediately. The ask price, also known as the offer price, is the price the market is willing to offer you, if you need to buy shares immediately. The simplest way to make a transaction is to buy shares at the ask price and sell shares on the bid price.
Since there are many exchanges, you will often run into terms like ‘inside bid and inside ask price’ or NBBO (National Best Bid Offer). These terms are all the same and simply means the current bid and ask price. The exchanges automatically arrange the highest bid price and the lowest ask price to ensure the best bid and ask prices.
Which order type you choose will depend on two main factors: price and urgency. You have to answer these two questions. Do you have a price that you want to execute the trade at? How soon do you need to get filled?
These are the fastest executed orders that will immediately fill you at the current bid price if selling or the current ask price if buying, within seconds. The main factor here is time. If your order must be executed urgently without consideration to price, then this will be your best order type. These orders are convenient since you won’t have to fumble with prices.
To place a market order, enter the number of shares to execute, select ‘Market’ as the order type and then click ‘Buy’ or ‘Sell’ to execute the trade.
Stocks with tight spreads, usually only one to three cents, will usually execute your trade without too much slippage during normal market conditions. However, in fast trading volatile markets, you may experience larger slippage especially with higher priced stocks with wider spreads. Market orders are best used with tight spread stocks during medium speed and lower volatility periods ideally at least an hour after the market open, unless you have to urgently execute a trade immediately. Market orders can not be placed pre-market or post-market.
Sell Orders in DAS Trader
Buy Orders in DAS Trader
These orders take a bit more effort to execute in that you will be required to specify a limit price you wish to get filled at. A limit buy price will buy shares up to that limit price. A limit sell price will sell shares down to that limit price. When placing a limit buy order below the current bid price, it will place your order on the bid side. When trying to execute a sell order higher than the ask price, it will place your order on the ask side.
Patience and willing to wait longer than a market order for execution is required. Limit orders are very helpful in fast markets as participants and trading programs scramble over each other for executions.
To place a limit order, specify the number of shares to execute, select ‘Limit’ as the order type and then enter the limit price. Specify how long to keep the limit order active by choosing ‘Day’ means to keep order alive until filled or cancel at the market close, ‘GTC’ is good until cancel, means to keep the order active until completely filled, cancelled by you or called on the close of the market. The ‘Fill or Kill’ designation is placed for immediate full execution or cancel. Click ‘Buy’ or ‘Sell’ to place the trade.
Limit orders are used for protection to avoid too much slippage on order fill prices. If you wish to take a long position on a stock that is rising quickly, you could place a limit order that is + .20 above the current ask price. This ensures order fills up to but not beyond the limit price. If your order doesn’t completely fill, then the order will stay open at the limit price until it is filled or cancelled. It is always important to confirm if your order has been completely filled. Seasoned traders tend to use limit orders exclusively so they always have some control of the worst case pricing amounts on executions. Limited orders can be used pre-market and post-market.
This order can be made on positions you already own. These also called stop-loss orders. These orders are placed with a limit price which will trigger a market sell or market buy-to-cover or when the stock price reaches a specific level.
To place a stop order, enter the number of shares to execute and select a percentage or a price level to execute. Select ‘Stop’ and then click ‘Buy’ or ‘Sell’ to execute the order. Please check with your broker for specific instructions for your platform.
Generally, it is best to keep mental stops as algorithm programs will purposely try to trigger stop orders in volatile markets. Stops orders should be placed if you cannot be present to actively monitor your positions. These orders are used to protect against larger losses, and to lock in profit gains. These orders are only executed during market hours.
Stop Orders in DAS Trader
Trailing Stop Orders
These are dynamic stop orders that adjust the stop limit price based on the movement of the underlying stock. Parameters can be set by percentage or price increments that will adjust your stop price limit order. For example, if you place a 20-cent trailing stop order on a long position, then your stop price will trigger when the stock pulls back 20-cents. If the stock proceeds to trade higher, the trailing stop will adjust the trail stop to trigger when the price fall 20-cents or more off the recent high. When placing trailing stop orders, it is important to factor in the typical wiggle room and not place them too tightly. Trailing stop orders can only be executed during market hours.
To place a trailing stop order, enter the number of shares to execute and select a percentage or a price level to execute. Select ‘Trailing-Stop’ and then click ‘Buy’ or ‘Sell’ to execute the order. Please check with your broker for specific instructions for your platform.
A conditional order is an order that will only execute if certain specified conditions are met. These orders allow for prudent traders or investors to engage in trades without having to be present. You must first specify a price condition then specify an action if that condition triggers.
Think in terms of IF THEN. Traders utilizing technical analysis may be waiting for a stock price to form a breakout higher, but expect an initial pullback on the first attempt. The logic would translate into something like ‘if AAPL trades above $106, then place a buy limit order at $105.90’.
The conditional order would read If AAPL > $106.00 THEN BUY 300 shares at $105.90 LIMIT Good-To-Cancel.
Conditional orders can have many conditions as well as many different actions upon specified conditions being triggered. It is important to be clear on your strategy before confirming the order. Conditional orders only fill during market hours.
Trigger Orders in DAS Trader