What is an Order in Trading?
CMX MarketsIn order to open or close a position on the exchange you have to place an order to buy or sell the traded asset. It is considered as one of the key skills in trading. So this article will explore what an Order is in trading.
What is an order on the exchange, and what is it for?
An order is used in many markets like the stock market, bond market, commodity market, financial derivative market or cryptocurrency exchange and it is an offer whether to open (buy) or close (sell) a transaction.
Simply put, an order is an instruction given by an investor to buy or sell a trading instrument, sent through the broker's trading platform. Technically, it is a command on the quotes chart, where traders set the transaction parameters: action (Ask/Bid), amount, and limit. If the market conditions are met, the transaction is executed. The trader is required to make a forecast and submit an order, the rest will be done by the broker and the exchange.
Order Types:
Market orders
Limit orders
Stop orders
A Market order is an order to buy something at the market's current best available price. Traders usually use this order type when they see a trading opportunity that pushes you to act quickly. The trader came to the trading floor and decided that this was the right time to open a position. For example, the “sell market” is selected - a market order to sell. So that a transaction to be completed, a counteroffer is required on the exchange - a buy order. There should be no issues in a liquid market as trading is active in both directions.
Bear in mind that a market order is instantly executed for a price that your broker provides at that given moment, which includes: buy and stop orders.
In addition, since market prices are changing so quickly, it might be that a market order may be executed at a slightly different price than you intended. In the market terminology, it is called “slippage” which can work both in the favor as well as against an investor.
A Limit order aka Pending order is executed only when the price specified in the order becomes available. If the market order is executed immediately, the limit order is executed at the best available price.
For example, an investor does not want to invest a lot of time manually opening a “Buy” position. That is why a Limit order is placed that will be automatically triggered at the indicated price.
Trading platforms set the minimum allowable number of points between the current value and the pending order. The distance you set cannot be greater than, but not less than the value.
There are 4 types of Pending orders:
1. Buy limit is buying at a price lower than the current ask price. It is triggered after a drop in value, a local bottom breakout, and an upward reversal.
2. Sell limit is selling at a price higher than the current bid price. For example, you assume that the asset price will go up, after which it will start to become cheaper. Then the order is set at the estimated higher price.
3. Buy stop is buying a trading instrument at a price above the current market price, and it is triggered when the market price touches or goes through the Buy stop price.
In case of a prolonged increase in the value of an asset, this type of order will allow to open a position at the most acceptable price for you and get profit on the subsequent rise in price.
Thus, this order involves buying at a higher price in a bullish trend.
4. Sell stop is selling when the market price is lower than the current market price. It can lower the risk of a falling market, as your long position will close automatically at the price you set.
For example, in case of a long decline in the value of an asset, the “Sell stop” order will allow you to sell it cheaply, and then buy it cheaper.
Going to the “Limit Orders”, it should be noted that there are 2 types that are used to reduce risks in trading:
1. Take profit (TP) – used to save profit.
It is a short-term trading strategy for day traders who want to take advantage of their fast-growing dividends and earn instant profits. This order is always placed above the “Bid” price for long positions and below the “Ask” price for short positions.
It is worth noting that “Take profit” orders are good for short-term traders because may help a trader to exit a transaction as soon as the profit objective is met, avoiding the danger of a future market drop.
Meanwhile, “Take profit” is not good for long-term trading as it is quite difficult to correctly determine whether the price will reach the target in the long term.
2. Stop loss (aka Stop order, Stop-market order or SL) – used to reduce losses.
It is a fixed order that causes a sale when the price of the trading instrument falls to a certain level, and the trader exits the trade to minimize the loss of the trade.
In a nutshell, Stop loss is an order from the trader to the broker to execute a trade when the market price is at a specific price level, which is a less favorable price than the entry price. Furthermore, it is a helping hand at times when you are not able to sit in front of the PC and monitor your trades.
So, with this in mind, the golden rule of better understanding order types – practice to gain experience and find what better suits your trader personality.
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