There are 4 fundamental order types that each data-feed/broker allows you to use:
- Market
- Limit
- Stop
- Stop Limit
MARKET order #
Use this type of order to buy/sell a certain quantity (to be specified when placing the order) at the current market price which corresponds to the price of the first ASK level if the order is a buy order, or to the price of the first BID level if the order is a sell order.
It is important to keep in mind that the price at which the order is executed is usually NOT the one displayed as the Last Price but differs by one or more ticks depending on BID/ASK spread present at that moment. The main advantage of this order type is its speed of execution, but in a very volatile market (or with a strong trend in progress) there is the risk of being executed at a different price (often disadvantageous) compared to the one at which wanted to be executed.
LIMIT order #
Use this order type to buy/sell at a specific price. In particular:
- To place a buy limit order you will need to specify an execution price less than or equal to the price of current first BID level.
- To place a sell limit order you will need to specify an execution price greater than or equal to the price of current first ASK level.
If specified price is greater than current BID (in the case of a buy order), or lower than current ASK (in the case of a sell order), the order will be executed immediately as the current price is more advantageous than the specified one.
The set of Limit orders for an instrument present on the market at a given moment are displayed in the DOM (Depth of Market), also known as Book. Their execution mechanism is based on FIFO (First In, First Out). In other words, orders placed earlier (in a given price level) are executed first. A waiting queue is then created. The quantities/lots in the queue for each price level are displayed in the DOM (or book) next to each price level.
The main advantage of this order type is the certainty of the execution price. The disadvantage is that the order risks not being executed.
Example: suppose we place a buy limit order for 1 contract at a price of 50.50 on instrument XYZ (which is priced at 50.54). At the same price level there are already 50 contracts placed by other traders. Our order will be inserted in the execution queue at the 51st place. The market at this point drops to 50.50 executing only 45 contracts and then returns to 50.54. Our order will NOT be executed because it has not been reached in the execution queue.
STOP order #
Use this order type to buy/sell a certain number of lots/quantities when a specific price level (trigger) is reached. The price specified in the order is NOT the execution price, but the price that triggers the order execution. In other words, when prices reach the trigger price, the order is placed as a MARKET order, then executed. You understand that the actual order execution price may be different from trigger price (especially at a time of high market volatility). This difference is called Slippage.
This type of order is usually used to close losing positions, or to open new positions if prices exceed specific levels.
More specifically:
- to place a buy Stop order you will need to specify a trigger price greater than the first current BID level (otherwise the order will be rejected by the broker).
- to place a sell Stop order you will need to specify a trigger price lower than the first current ASK level (otherwise the order will be rejected by the broker).
Stop orders are NOT part of the orders displayed in the Book. That is, sizes in Bid/Ask DOM columns DO NOT include stop orders. This is because these orders are placed on the market by the broker ONLY once the trigger price is reached.
STOP LIMIT order #
This order type is similar to STOP order with the difference that in addition to the trigger price, a limit price at which the order must be executed is also specified. The limit price is specified as an offset (in ticks) from trigger price.
Once the trigger price is reached, the order is placed on the market as a LIMIT order.
The advantage over a STOP order is that the order execution price will be the specified limit price or better. The disadvantage is that the order risks not being executed, therefore ending up in the order book (especially when volatility is very high).
