Stock Order Types: How to Properly Use Trade Orders

If you’re trying to become a better trader, you must know different stock order types. 

Whenever you make a trade, you have to place an order. But there are several order types to choose from. Which is right for you?

Making the right choice means you need to be educated on different stock order types and how they work. They can affect your profit and loss and impact your overall trading experience — for better or worse.

Having this knowledge can help you determine when to use certain order types so you can learn to better manage your wins and losses.

So let’s take a look at stock order types, and how they can help you trade more effectively…

What Are Stock Orders?

Before we get started, let’s take a sec to define what a stock order is…

A stock order is a set of instructions to your broker for how you want to buy or sell a security.

There are a lot of specifications you can set. It’s like ordering a hamburger. You might choose mustard, mayo, and hold the tomato. Stock orders are similar — you tailor them to your trading needs.

Certain stock order types let you set restrictions on trades. These can help determine the price of entry, price of exit, and even the time a trade happens. You can also adjust the settings so that an order will only be placed if it fits your criteria.

Now that you have a basic understanding of stock orders, let’s dig deeper into some things you should keep in mind when choosing one.

Time Horizon

Time horizon might sound a bit sci-fi, but it’s a relevant stock market term for order types. It’s basically the amount of time you’re holding an investment before you liquidate it.

For a day trader, this can be for a very short time — sometimes only seconds or minutes.

For a longer hold, like a position in a mega-cap company, it might be years or even decades.

The time horizon has everything to do with your goals.

Before you consider any trading strategy, familiarize yourself with its time horizon. For instance, if you’re trading penny stocks, you shouldn’t expect to hold it for months or years.

Various things can affect the time horizon. For instance, if you’re a day trader in your 20s, your time horizon might be different than someone who’s in their 50s.

Life factors can come into play, too. If you’re saving for a down payment on a house or investment property, you might have a different time horizon than other traders.

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Risk Tolerance

The stock order type you choose depends on your risk tolerance.

There are several different types of risk tolerance, including conservative/risk-averse, moderate, and aggressive, with many points in between. It’s all about how much you’re willing to risk on a trade, your position size, and how you’ll approach the market.

Find your risk tolerance level so you can make smarter decisions for every trade.

There’s no one-size-fits-all option for trading. Develop a style that’s sustainable for you.

Stock Order Types: Examples

Ready to learn about the different stock order types? Here’s a list of the types you’ll see frequently, with an explanation of when you might use them…

Market Order

Market orders are for buying and selling right now.

This is a simple order that usually gets filled right away.

Although, there’s no defined price. Even if you see a price around the time you take the trade, it doesn’t mean you’ll get filled there. You’re buying into the stock at the current market price, which can change fast — especially with the penny stocks I like to trade.

For a market sell order, you’ll usually get filled at or around the current bid price. For a market buy, you’ll get filled around the current ask price. But these outcomes aren’t guaranteed.

If you’re trading online, a market order can be executed almost instantly…

Even so, the price can change in as little as a nanosecond. Even if you see a certain price the moment you click the button, it’s subject to change. This is especially true for stocks with high volume.

In general, you can expect that with a market order, you’ll pay the highest price out of all the current sell orders and get the lowest price out of the current bids.

When to Use Market Orders

Entries and exits are crucial to day traders. So, even if you’re not guaranteed a set price, when should you use a market order? Here are a few examples of when it makes sense…

If you need to get in fast. When you really want to get into a trade and speed matters more than price, a market order might fit the bill. But be aware of buying a stock based on a hot tip or alert. Never blindly follow alerts.

If you want to cut losses. Stuck in a hard position and need to cut losses FAST? A market order could help you get out ASAP.

If the range is narrow. When a stock isn’t making huge moves, a market order is less likely to vary dramatically from the ask or bid price.

Limit Orders

A limit order adds a few more restrictions to the basic market order. These can help with locking in specific prices.

A limit order will only be executed if the price reaches your desired target. It’s gotta reach the target price or lower for buying. With selling, it’s the target price or higher.

So if you’ve been watching the stock and know the price where you want to enter, you can set the limit order to only execute if it reaches that point. If the stock never hits your limit price, the order won’t be filled.

When to Use Limit Orders

Here are some key times to use limit orders:

When you have a specific entry/exit in mind. Since the limit order allows you to only buy if the stock reaches a specific price, it makes sense to use one for a firm entry and exit.

You want to buy below market price. If the current market price is high but you think it’ll go lower, a limit order allows you to bid and possibly get the price you want.

You want to sell above market price. If you think the stock’s price will go higher than its current level, a limit order can potentially get you filled at a higher price.

When it comes to the last two points, be very careful to set reasonable numbers. Otherwise, you could lose your entry window and miss the whole trade.

Stop Orders

A stop order, also known as a stop-loss order, will buy or sell a stock when it reaches a specified price. This is called the stop price. Once the stock reaches the stop price, the order is automatically executed as a market order.

A buy stop order is set at a target price that exceeds the current market price — it’ll only fill when the price reaches that target. A sell stop order is placed below the current market price. When a stock drops to the price you entered, the order will execute and you’ll exit the trade.

A stop order is not a guarantee that you’ll get filled at that price. In terms of selling, some shares may get filled below your stop. This is referred to as slippage.

Learn more about slippage in this video:

Trailing Stop Order

This is similar to a stop-loss order in that it’s designed to protect you from losses. But it works a little differently. A trailing stop order allows you to set your order a specific percentage away from the stock’s market price.

It can offer more flexibility than the stop-loss order, which is fixed and would need to be manually reset.

One benefit of a trailing stop is that it lets you specify how much you’re willing to lose, but it doesn’t put a cap on potential profits.

Find out more about the trailing stop in this post.

When to Use Stop Orders

When should you use a stop order? Let’s take a look…

If you can’t be near your computer. If you find yourself in a situation where you might not be able to stay on top of the trade, a stop order could be a good backup.

If things are volatile. Volatile stock prices can change very quickly. A stop order can potentially help you limit losses.

If you want to protect gains on a short sale. Some traders use buy stop orders when short selling as an added safety measure.

If you want to limit losses. My #1 rule is to cut losses quickly. A sell stop order can potentially help you do that, especially if you struggle with discipline.

Additional Order Types for Trading Stocks

Here are a few more stock order types and distinctions you should know…

All or None (AON)

An ‘all or none’ is a specification you can make when you buy or sell a stock. It tells the broker to either fill the order completely or not at all. For example, if you want to buy or sell 100 shares and not all of them are available, the order won’t be executed.

Keep track of this order type if you use it while day trading. If you don’t get filled on the right side of the move, it could remain active and you may get filled on the wrong side.

If you want to get filled using an AON order, certain factors make it more or less likely. You’ll have an easier time with a volatile stock. The shares are more likely to be available.

But remember: the bigger the order, the harder it can be to get filled.

Good ‘Til Canceled (GTC)

Traders can use a ‘good ‘til canceled’ (GTC) order to buy or sell stocks. It stays active until the target price is hit or until the order is canceled.

Don’t take the name too literally, though. This type of order doesn’t stay active forever.

Usually, the order will have an expiration date of 30 to 90 days after it’s placed. This keeps traders from being caught off guard when they thought a trade was over and done with.

GTC orders work best when you’re not able to constantly monitor stock prices, like for swing trades. You can place your order, set it at a specific price point, and keep it open for a few weeks.

If the price reaches your desired point within a finite period, the trade will execute.

It’s also possible to use a GTC order as a stop order. You can set the price below or above the market price to help you manage your risk.

There is a drawback, though. GTCs can be a little harder to come by.

But some brokerages continue to offer this stock order type. Although, they handle them internally.

And GTCs can carry risk when the market’s extremely volatile. Remember, it only needs to dip above or below a certain point for the trade to be executed, even if it’s for a minute. If the price rebounds immediately, it could spell out trouble.

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Day

A day order is similar to a GTC, but with a much shorter duration. This type of order expires at the end of the trading day.

Like a GTC order, a day order specifies the price at which a trade is executed, whether it’s a buy or sell. However, unlike longer duration orders, if the trade doesn’t go through the same day, it’s automatically canceled.

For many trading platforms, this is the go-to duration. If you wanted to set a longer duration order, such as a GTC, you’d have to change the settings manually.

Some day traders like using day orders because you can set a specific price where you’d like to execute, and then walk away. Personally, I don’t like that approach. I prefer to actively watch my trades, and I stick to mental stops.

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4 Stock Order Tips for Successful Traders

Ready to put these order types to work? These tips could help you big time…

Get to Know the Price Restrictions You Can Place Within an Order

Not every broker handles orders in the same way. Check your broker’s rules for placing orders so you don’t get caught off guard.

Also, keep in mind that if you use a stock order type that has an automatic execution, there may be tax consequences.

Yep. You might be subject to unexpected expenses like higher tax rates on capital gains.

Here’s how that might work …

In general, the capital gains taxes on assets you’ve had for less than a year are lower than an individual tax rate.

However, a stop-loss order could execute a sale on a stock you’ve held for less than a year. In this case, the capital gains could be taxed at potentially high rates, plus other possible surcharges. Yikes.

Note: This is in no way legal or financial advice. Always consult a licensed professional in your state or jurisdiction before making tax or legal decisions.

Understand How Stop Limit Orders Are Executed and Filled

A stop-limit order offers a little bit of stop and a little bit of limit order by letting you set two different price specifications.

You set the price where you want to enter.

The second is the limit price, which is basically where you tap out. If the stock goes above that price, you’ll no longer fill more shares.

With this stock order type, you have to choose a time frame. They don’t last forever.

As a trader, one benefit of the stop-limit order is that you have more control over when an order should be filled, and the range that it’ll be filled in. But once again, if it doesn’t reach the price entered, the trade will not be executed.

Understand the Time Limitations You Can Place on an Order

Stock order types have different time limits. Get familiar with the time restrictions that can come with each.

Stop, market, and limit orders can all include time restrictions. If you don’t want to be a victim of an unexpected buy or sell, learn about the restrictions that apply to each.

For example, you may love GTC orders because of the freedom they can offer. But on the other hand, if you forget and the order gets filled after your plan is relevant, it could turn into a bad trade.

Any time you use an order type, remember the differences and use the most appropriate one for that trade.

Always Seek More Knowledge

Keeping track of all the stock order types can be confusing, but you need to know this stuff. This type of technical knowledge can help you develop an edge.

Also, focus on your trading education. Knowledge is key for finding a strategy that works for you. Keep learning as you hit big milestones and work toward your trading goals.

The right education can potentially shorten your learning curve, compared to trying to go it alone.

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Frequently Asked Questions About Stock Order Types

The Bottom Line On Stock Order Types

The more you know about stock order types, the better. It might seem trivial at first, but they can have a big impact on your experience as a trader.

By choosing the right stock order type for a trade, you can potentially get better prices…

But you can never completely eliminate risk in the markets. But you can potentially reduce risk and hone your discipline by using an order type that makes sense for your strategy.

That’s key for becoming a self-sufficient trader.

Do you understand the different types of stock orders? Let me know in the comments!