Types of Orders in Trading

Types of Orders in Trading
Before getting started to trade, a trader needs to get familiar with types and specification of orders in order to prevent from making unnecessary mistakes.

Below is a list of a number of types of orders. I’m trying to organize them for easier understanding. We’ll discuss each of them further in the next posts.

Too many types of orders may cause some confusion and lose of focus. Therefore, I also mark a few of very common types of orders in the list below with “***”.
(Click the LINK in BLUE FONTS below to read the posts on each type of orders).

For beginners, you can start to get familiar with these marked types of orders first, before moving on to more advanced types of orders. Hope this can help you to speed up your learning. :-)

Types of Orders related to How an Order will Get FILLED:

1) Market Order ***
2) Limit Order ***

3) Market-On-Close (MOC) Order
4) Limit-On-Close (LOC) Order

5) Market-On-Open (MOO) Order
6) Limit-On-Open (LOO) Order

7) Market-To-Limit (MTL) Order
8) Iceberg Order

Types of Orders related to the TIMING / DURATION of the Order:
When submitting an order, a trader also needs to specify the timing or duration in which the order will still be active / valid before it gets executed.

1) Day Order ***
2) Good Till Cancelled (GTC) ***
3) Good Till Date/Time (GTD)

CONTIGENCY ORDERS
Contingency Order is an order that is to be executed only if one or more specified conditions are met.
Possible conditions may include quantity, price (of that security or another security), or the completion of another order.

Even though some brokers accept contingency orders, they are actually not obligated to do so. However, if they do accept such orders, they must abide by the terms of the order.

Examples of contingency orders are listed below.

Contingency Orders with Conditions related to QUANTITY / SIZE of Order and TIMING of Execution:
When submitting Market or Limit Orders, it is also possible to attach conditions that are related to the ability of the broker to fulfill the quantity / size of the orders and timing of execution.
Contingency orders with such conditions are as follow:

1) Fill-Or-Kill (FOK)
2) Immediate-Or-Cancel (IOC)
3) All-Or-None (AON)

Contingency Orders with Conditions related to PRICE
Contingency orders with conditions related to price are very useful, particularly when you cannot monitor the market all the time. These orders allow traders to open or close position in the market automatically once certain conditions are met.
Examples of Contingency orders with conditions related to Price are as follow:

For Automatic OPENING of a Position:
The following are some types of orders that allow you to open a position in the market automatically once a certain condition is met, particularly when you cannot monitor the market all the time:

1) Market-If-Touched (MIT) Order
2) Limit-If-Touched (LIT) Order

For Automatic CLOSING of a Position:
The following are some types of orders that allow you to close the position automatically once certain condition/s is/are met, in order to protect your position, particularly when you cannot monitor the market all the time:

1) Stop Order ***
2) Stop Limit Order
3) Trailing Stop Order ***
4) Trailing Stop Limit Order

More COMPLEX Types of Contingency Orders
1) Conditional / Contingent Order
2) Bracketed Order
3) One-Cancels-Other (OCO) & One-Cancels-All (OCA) Orders
4) One-Triggers-Other (OTO) & One-Triggers-All (OTA) Orders


Market Order
Market Order is an order to buy or sell immediately at the best available price in the market at that time.
The advantage of Market Order is that it will guarantee an execution.
However, the disadvantage of this order is that you cannot control the price at which your order will get executed (or filled), and hence you also won’t know at what price your order will eventually get filled.

Typically, if you are going to buy shares/options, you will pay a price near theAsk Price. If you are going to sell shares/options, you will receive a price near the Bid Price.
However, it is important to note that the last-traded price is not always necessarily the price at which the Market Order will be executed.

When the market is very liquid with very tight bid-ask spreads and not so volatile whereby prices don't change drastically, this kind of order is rather safe.
However, in fast moving & volatile market whereby prices move very fast, or in a less liquid market whereby bid-ask spreads is wide, placing a Market Order can be quite risky, because the price at which the trade got executed (or filled) can deviate significantly from the last-traded price.

When the size of a Market Order is quite big, it is possible that the broker will split the order across a number of participants at the other sides of transaction, resulting in different execution/filling prices for different portion of shares/options.





Limit Order
Limit Order is an order to buy or sell by setting the maximum price (for buy) or minimum price (for sell) at which you are willing to buy or sell.
Hence, when you buy shares/options, you will not pay at any price higher than the limit you set, and it’s even possible for the order to get filled at a price lower than the stated limit.
Similarly, when you sell shares/options, you will not receive at any price lower than the limit you set, and it’s also even possible for the order to get filled at a price higher than the stated limit.

While Limit Order has an advantage that you can be sure the order will be executed / filled at the limit price or better, the disadvantage of this order is that there is no guarantee that the order will be executed / filled.

As a result, in the case when the price has moved up while you are placing a buy order (particularly when the market is moving very fast at that time), the order may not get filled.
Therefore, if an order is not filled on Limit Order within a few seconds, you should check what the prevailing ask price is at that time, and then modify the order accordingly if you’re still interested to buy the shares/options.

Note:
Some brokers may charge different commissions between Market & Limit Orders.
Typically, due to more complexity / additional condition, the commission forLimit Order is more expensive than for Market Order.
Hence, you need to check your broker’s commission before placing a Limit Order.





Stop Order
Stop Order is an order (buy/sell) to close a position that only executes when the current market price of an option/stock hit or pass through a predetermined price (i.e. Stop Price).
Once the Stop Price is passed, the Stop Order would convert into a Market Order, and will be filled at the best available price in the market at that time.
Stop Order is also known as Stop Loss Order or Stop Market Order.

Stop Order is commonly used to limit / reduce losses on a position when the price moves sharply against the trader/investor, or to lock in profit from aposition to prevent you from “giving your profit back to the market”.

Depending on the position on the market you have (long or short), there are 2 types of Stop Order:
a) Sell Stop Order
This is the stop order (to limit losses or to lock in profit) when you have a longposition on a security.
In this case, the Stop Price is placed below current market price of the security.

b) Buy Stop Order
This is the stop order (to limit losses or to lock in profit) when you have a shortposition on a security.
In this case, the Stop Price is placed above current market price of the security.

Note:
When placing Stop Order for an Option, the order will be triggered based on the market price of the option, NOT the market price of the underlying stock. Therefore, the Stop Price should be set based on the option’s price as well.

Therefore, just remember how the price of Call and Put options are related to the underlying stock price:
For a Call option, the option’s price increases when the underlying stock’s price increases, and decreases when the underlying stock’s price decreases (positive relationship).
On the other hand, for a Put option, the option’s price increases when the underlying stock’s price decreases, and decreases as the underlying stock’s price increases (negative relationship).

Characteristic & Risk of Stop Order:
Stop Order will remain inactive until the Stop Price is passed. Once the Stop Price is passed, the order will be activated as a Market Order.
Therefore, the disadvantage of Stop Order is that while it guarantees execution, the order cannot guarantee that it can be filled at the specified price.
Basically, once the Stop Order has been triggered (i.e. when the price hits or passes through the Stop Price), it turns into a Market Order, which will be filled at the best available price in the market at that time.
This price may be “worse” than the predetermined Stop Price (i.e. lower for Sell Stop, or higher for Buy Stop), particularly during volatile price movement.
Hence, basically the same advantage & disadvantage of Market Order apply to Stop Order as well.

Example:
Suppose a Sell Stop order were placed to protect a long position on a Call option with a Stop Price at $2/contract. The current market price is $2.5/contract. This order would remain inactive, unless the price reaches or drops below $2. When that happens, the order would then be triggered and turn into a Market Order, and the option will be sold at the best available market price.
Hence, in case the market price gap down at $1, the price at which the order will get filled would be around that price, which is much worse than the stipulated Stop Price.