Should you use a limit order
or market order? How should you set stops effectively to protect your trading account?
Limit, market, trailing, OCO, OCD…. You are probably wondering what the heck all these trading
orders are on your broker platform. And you can actually use them for your trading strategies.
Getting to know these order types are actually extremely important especially if we are day
trading short term market volatility, whether they are the low float runners, or large cap breakouts.
That's why today we will take a look at the types of trading orders in the stock
market. We’re going to break down the details of the major trading order types
that you should all be able to find on your various desktop and mobile brokers.
They orders types will not only get you the best entries and take profit possible,
they will also help you limit the losses. By the end of the video,
you will know how to use them to your advantage. Before we dive right into today’s topic,
make sure you drop a like at the bottom of the video subscribe to this channel if you
haven’t already or else, I am coming for you. I mean it. I'm coming after you with my bad
jokes! So now, hit the subscribe button. Now to the fun part. To get the hang of
trade orders you need to understand the most elementary of trade orders which is our first
order type here, market order. Why is it the most basic one? Because it is the order type that can
be executed instantly, whether its buy or sell, regardless of what the current prices area.
Yea it’s that quick. Market orders are best suited
for trading high-volume securities like futures and large-cap stocks
typically during market hours. Not for low volume trading premarket or afterhours.
There is little or no hassle when using market order, all you need is just to push
a button to execute the order to buy or sell. This is a very common order type
brokers like Robin Hood and Thinkorwsime execute your orders at.
The biggest pro of market orders is, of course the speed of execution like we mentioned.
But there is a huge downside to using market order. say when you are dealing with low float
stocks, the market orders may get filled at unexpected prices. For example, too high of
an entry when you were buying breakouts. Or sell too low when you’re trying to take profit.
that could actually cost you a lot of trading profits,
and sometimes even lead to bigger losses as well.
Let’s put things in perspective here. Let’s assume that the bid-ask prices for shares of Zoom video,
ZM Morgan are $493.26 , and 494.36, respectively, with 100 shares available
at the ask. Let’s you’re a baller and decide to buy with a market order 500 shares of ZM.
Since you’re using market order, it’ll get filled on the ask,
which is the best available price someone is selling, and you’ll get filled instantly.
Since the seller at the top only has 100 to sell, you’ll get filled first 100 $494.36
The next 400 shares will fill at the best asking price for sellers of the next 400 shares.
So in this case, you’ll buy order will fill some at 494.50, 494.94. So you can see that
market orders are not suitable for thinly traded stocks like ZM.
market orders are best for people buying long term investments, long term swings positions,
people using free commission brokers, bank investing platforms etc. But not for
active day trading entries/exits, unless it's stopping out, which we’ll talk about later on.
If you use market orders for entries and take profits when trading, you are essentially at
the mercy of the market makers, who of course will try to rip you off as much as possible, and give
you the worst fills. Sometimes 10 or 20 cents off if the spreads between bid / ask are quite wide.
Here's some friendly advice, always take a very close look at the bid-ask spread,
and teh volume before you place a market order.
2. Now If you have
issues with the lack of control that comes with trading with market orders then definitely use
Limit orders. Which is the second important order type to know in day trading. And it is indeed
the most commonly used order type. Almost all the order types I use are limit orders,
for buying, selling, shorting, and covering. and I use market orders when I'm setting stops.
Why is a Limit order different from market order? because it literally limits the exact price your
buy or sell orders can be filled at. This way traders are sure
to get their desired, and best prices for their stock positions.
For instance, when you use a buy limit order, the order gets executed at the
limit price or a lower one. If you are using a sell limit orders you can be
sure that the order gets executed at the specific price or a higher one.
Let's say you choose to buy stock a low float runner like UONE
in this example. You see the stock is too high right now afterhours
at 7.8. But you want ot buy at $7 whole dollar mark pull back instead.
So to do that you can place a limit buy order at 7. This way you if this stock does pull back
you’ll get filled at 7 or cheaper at like 6.99, or 6.98,
which is in your favor right. Its like you’re bidding to buy a lamborghini on ebay
for half a million but you ended up getting it for 499,000. What a steal.
And its the same way when you’re selling your stock
with limit order too. So if you want to sell and take profit here at 8,
your order wont get filled until the stock hits that exact number ot the cent, or higher.
You can see why its more advantageous for day traders to use limit orders with
entries and taking profits. And That's not all. Limit orders come in handy
when the market is volatile and stocks are rising or falling at heart-wrenching
rates and you want to avoid getting bad fills or getting screwed over by market makers who
will most definitely fill your buy orders at the very top, and your sells at the bottom,
especially when you are trading these volatile low float small cap runners.
Also limit orders are great for part time traders,swing traders, and longer term investors,
who just want to buy when a stock actually gets to their desired support levels on the daily chart.
All you do is to set the limit buy price and wait for the stock to hit your price.
Well while these options are great, it would be nice for you to note that limit orders
can be frustrating too you know. How? They may never get filled. Yea.
Sadly, you can only control so much in the market
and some of the things you can't control are how and when a limit order gets filled.
The order might just sit there forever and forgotten without getting filled until you
cancel it and this could lead to missed opportunities, and even potential losses.
If UONE never pulled back to exactly 7 to the cent,
your buy order would never get executed. . Not if it touches 7.03 or 7.01. No it
has to be to the cent. And you might be partially filled only too, maybe only 100 shares gets hit at
7 and the rest of the 900 shares buy limit order stays pending fi the stock bounced off 7 so fast.
Like its name suggests stop orders are designed to buy
or sell an asset when its price moves past a particular point to the cent.
The worst case would be, if you are stopping out of your positions with limit order. If the stocks
are like the low float runners we talked about, or the stock has high spreads,
then you may never get filled on that stop if the stock crashes through your price
too quick. And that's why, when using stops, I recommend using stop market order.
3. Which brings us to the third trading order type. Stop order. Like the name suggests,
its meant to stop your position,whether you are long or short. This way you get
to limit your losses according to your risk, and protect your account capital.
With a stop market order. Once the specific price crosses a predefined point, the stop
order converts into a market order which is then executed
at the best price available. Your order to stop out of all your shares will fill.
For example, lets say you are long 1000 shares of SPI at $25. you want
to stop out play SPI if it breaks below $22, since its a very low float volatile stock,
the stop market order could fill some of your shares maybe 200 shares with slippage at 22, and
the rest of 800 at 21.8, or 21.5. But all your shares would be stopped out for sure below 22 .
At first glance, you might be thinking, wait humbled trader, that means Ill lose
a lot more than I had wanted. It sounds like I should have used stop limit orders at $22 instead.
I understand that, but trust me, most times you’ll be thankful you got out
of all your long shares, instead of having the stop
limit order not trigger at all if the stock moves too fast, or your broker is too slow.
Imagine being stuck holding the bag with the rest of 800 shares long on SPI at $22,
and the stock is down to $15. All because you wanted to save $0.50. Its not worth it my friends.
So if you find yourself in a situation where you are unable to monitor your stocks for an extended
period, I recommend using stop market orders on your day trading positions. For most large cap
stocks with a closer spread, you shouldn't have too much slippage problems when stopping out.
4. The next
type of trade order you should know about is the Bracket order.
This trade order is a conditional order that helps investors to have a profit target,
as well as a stop order, automatically activated, when they enter a new position long or short.
This is an extremely useful order for part time traders
who cannot stay glued to the screen and watch their positions all day.
If we’re looking to enter a long position, Once the main buy order is executed, your broker
platform then will automatically place two more orders for you. One is a sell order for you
to lock in profits, and the other is a stop loss order, in case your trade goes against
u. And Once one of the others gets executed, the other order automatically gets canceled.
SO 2 layers of orders, ONE at top and bottom like the bread,
and the stock posiitton in the middle like a ham and cheese sandwich, that's how I think about
bracket orders. Also because i'm kind of hungry right now.
Let's say our friend Mike Bagholder here wants to buy 100 shares of Tsla
at 399. If he uses A bracket order, the top piece of bread this allows him lock
in profits on his long position when the bid price reaches $406.
But he has to make sure he stops out fi the trade works against
him too. Which is where the bottom piece of the sandwich bread
comes in. his stop-loss exit to trigger a market sell order if the price reaches $397.
So by using a bracket sandwich order, mike bag holder can make sure he is risking
1 to potential make 3 or more. And so he doesn't get stuck bagholding anymore.
Remember that the two brackets, the sandwich breads, are also called OCO order pairs.
OCO stands for One cancels the other. So once our Mike baghodler takes profit, or stops out,
the other pending order is cancelled.
The downside to bracket order is that they can only be used for intraday
trades as all brackets are automatically cancelled when the market closes.
5. Now lets move on the our fifth order type. Trailing stop. A trailing stop is
essentially a stop order on steroids. It’s an order type that traders often use to let
their winners ride, as long as the trend continues to the upside
if they’re long. Or to the downside if they are short.
Trailing stop will stop out the position, if the stock reverses to a predetermined amount,
from the highest point. So this order type would be very useful for large cap stocks
taht tend to trend for teh day in a directional market, such as earnings breakouts,
or stocks thats dropping all day due to short seller report like NKLA.
For these large cap examples, you can set a trailing of 70 cents to a dollar.
So when and if the stock breaks out and pulls back some in a normal condition,
you still stay in that trade. Remember its normal and healthy for stocks to pull back.
But if there is a major reversal in the trend, your trailing stop will ensure that you get
to keep most of the profits. Whether you are using trailing stop for long or short positions,
you can rest assured that your profits are
protected as the trade stays open for as long as the price is in your favor.
So these are some of the most common order types we use in trading. To summarize,
for active day trading entries whether it's buy or sell, its best to use limit orders.
For stop orders thats meant to protect your position if the stock goes against your direction,
its best to use stop market orders. For part time traders or traders who need to step awya,
they can use bracket orders and trailing orders to take care of their exit and stops.
And for people who just want to gtfo out of a position asap and dont care about market markers
filling them at the very bottom, market orders your best bet.