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Trade Orders Explained

Trade Execution in the Financial Markets

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A bit about how trading works.   Trading is best described as an auction market.  On one side there are buyers who are bidding to purchase a security like Amazon or a cryptocurrency like Bitcoin.   On the other side are sellers who are asking for a price to sell a stock like Amazon or a cryptocurrency like Bitcoin.  These are commonly referred to as the Bid and Ask or Bid and Offers for a given market.  The best way to visualize this is to stack them up in two columns one side is the buy-side and the other is the sell-side with the trading prices in the middle.  Those bid and offers also show how much volume I behind those prices.

Trading Order Types in Relation to the Market

Basic Order Types

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 at the time the order is executed. When you are buying with a market order you will be matched with the current ask price when your order comes up to be executed. When you enter a market order sell you will be matched with the current bid price at the time when your order comes up to be executed.  

Market order Example: If the current bid is 85 and ask is 86 and you enter an order to buy 1 contract at the market then you will be filled at 86. If you enter an order to sell 1 contract at the market then you will be filled at 85.

2. Limit Order

A limit order is a trade order to purchase or sell at a specific price end the limit. Not that even thought a market may trade at the limit price it may result in a trade. It depends on a couple of things. 1) Did the bid for the sell or the ask for the buy reach that price. 2) if it did was the trade allowed to execute while there was enough trades to match the limit order or not. 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. N

A buy limit order is used by a buyer and specifies that the buyer will not pay more than $x per share, with $x being the limit order set by the buyer.

A sell limit order is used by a seller and specifies that the seller will not sell a share under the price of $x per share, with $x being the limit order set by the seller.

Limit Order Example: If the current bid is 85 and ask is 86 and you enter an order to buy 1 contract at 84.50 limit then the ask will need to trade at or through 84.50 to be filled at 84.50 or better. If you enter an order to sell 1 contract at 86.50 limit then the bid will need to trade at or through 86.50 to be filled at 86.50 or better.

3. Stop Order

A stop order is executed is generally used as a risk management order to protect profits or limit losses defined by you the trader.  It can also be used for entering trades when a market breaks out of a range.  When the market trades at the stop price it “activates” and becomes a market order to be filled.

Example of a Stop Order: If the current bid is 85 and ask is 86 and you enter an order to buy 1 contract at 87 stop then the market needs to trade at or through 87 to be executed. If you enter an order to sell 1 contract at 83 stop then the market will need to trade at or through 83 to be executed.

Stop Order Example:

4. Stop-Limit Order

A Stop Limit Order is basically like a Stop order however, it places a limit on where it can be filled. The downside of this is if you are using a stop limit as a stop loss and the market quickly moves through your stop and beyond the limit then the order will not be filled.

Example of a Stop Limit Order: If the current bid is 85 and ask is 86 and you enter an order to buy 1 contract at 87 stop 88 Limit then the market needs to trade at or through 87 but not past 88 before it is executed. If you enter an order to sell 1 contract at 83 stop 82 limit then the market will need to trade at 83 but not below 82 before it is executed.

5. Time Limit Orders

Day orders are orders that are good until the close of the regular trading session for whatever contract you are trading.

GTC orders is a Good-til-Canceled order that is good until the order is canceled.

GTD orders is a Good-til-date order that is good until it is either filled or until the expiration date.