In light of a hopefully exciting week of trading coming up, I think it is important that everyone understands how to take profit through the use of the various orders that brokers offer. Not every broker offers every type of order so you need to double check with yours to see what types are available to you.
1. Market Order
A market order is a trade order to purchase or sell a stock at the current market price. A key component of a market order is that the individual does not control the amount paid for the stock purchase or sale. The price is set by the market. A market order poses a high slippage risk in a fast-moving market. If a stock is heavily traded, there may be trade orders being executed ahead of yours, changing the price that you pay.
This is the type of order you want to use to get into or out of a position RIGHT NOW, but it is risky because you are going to likely get a bad fill. Useful for taking a position on a running stock or taking profits during a knife.
2. Limit Order
A limit order is a trade order to purchase or sell a stock at a specific set price or better. A limit order prevents investors from potentially purchasing or selling stocks at a price that they do not want. Therefore, in a limit order, if the market price is not in line with the limit order price, the order will not execute. A limit order can be referred to as a buy limit order or a sell limit order.
This is the type of order you want to use to enter a position on a ticker that you don’t mind waiting for a good entry on. Set your limit at the bid or even below it, and go about your trading day. This type of order has a conditional fill, so if you want to ensure you get a position you’re better off using a limit at the ask or above, or just using a market order.
3. Stop Order
A stop order also referred to as a stop-loss order, is a trade order designed to limit (and therefore protect) an investor’s loss on a position. A stop order sells a stock when it reaches a certain price. Although a stop order is generally associated with a long position, it can also be used with a short position. In that case, the stock will be purchased if it trades above the stop order price.
A stop order is basically a market order that goes into effect when the price of a stock or option drops to a certain price, which enacts a market order at that price and gets you out of your position.
4. Stop-Limit Order
A stock-limit order is a conditional trade order that combines the features of a stop and limit order. A stop-limit order requires placing two prices – the stop price and the limit price. Once the stock hits the stop price, the order becomes a limit order. Stop-limit orders, as opposed to a stop order, guarantee a price limit. On the other hand, a stop order guarantees an order execution but not necessarily at the stop order price.
This is similar to a stop order but can be used to ensure you don’t give up more profit (or incur more losses) than you need to. However, if the stock is completely tanking this type of order runs the risk of not executing, leaving you to incur even more losses than a stop order would.
5. Trailing Stop Order
A trailing stop order is similar to a stop order. However, a trailing stop order is based on the percentage change in market price as opposed to a specific target price. Although a trailing stop order is generally associated with a long position, it can also be used with a short position. In such a case, the stock will be purchased if it increases by a determined percentage.
For example, an investor purchases a stock at a price of $10. The investor places a trailing stop order of 20%. If the stock declines 20% or more, the order will be executed.
Trailing stops are not “orders” per se, but they’re a means to automatically move or “trail” stops (basic stop orders). Think of the trailing stop as a kind of exit plan.
Here’s how it works. Let’s say you purchased shares of stock, and your entire position is now in the profit zone. What might you do with your stop? You can leave it in place. You can move it up to a more “break-even” level to avoid loss should the market move against you. Or you can set it to “trail” your profitable position as it moves higher.
Suppose you set a trailing stop a specified distance below your current position.
If your position continues to move higher, your trailing stop also moves higher.
If your position declines to match the price of your trailing stop, your stop order is triggered, closing your position.
6. Good 'Til Canceled (GTC)
This is a time restriction that you can place on different orders. A good-til-canceled order will remain active until you decide to cancel it. Brokerages will typically limit the maximum time you can keep an order open (or active) to 90 days.
7. Day
If you don’t specify a time frame of expiry through the GTC instruction, then the order will typically be set as a day order. This means that after the end of the trading day, the order will expire. If it isn’t transacted (filled) then you will have to re-enter it the following trading day.
8.One-Cancels-Other Order
A one-cancels-other (OCO) order is a conditional order in which two orders are placed, and one order is canceled when the other order is filled. This may sound complicated, but it’s fairly easy to understand in context.
Suppose you buy shares of a stock trading at $40. Your profit target is 30%, and you don’t want to lose more than 10% value in your position.
You might place an OCO order consisting of a sell limit (“take profit” order) at $52 and a sell stop (often called a“stop-loss” order) at $36.
If the stock’s price reaches $52, your position will close out at a profit and your sell stop will immediately be canceled, removing the risk of inadvertently opening a short position should the stock decline to trade again at $36.
9. Bracket Order
Available in most trading platforms designed for active traders, a bracket order will immediately place an OCO “take profit” and a stop order once a position is opened.
If you enter a long position, a bracket order will immediately place an OCO sell limit (take profit) and sell stop.
If you enter a short position, a bracket order will place an OCO buy limit (take profit) and buy stop.