There are lots of different types of stock orders that your broker will provide. But in reality, you only need to employ a few to be able to trade successfully and manage your trades well. The orders that you need to know are:
These are the 4 types of stock orders that you ever need to know for swing trading or investing. If you use Interactive Brokers, you will not need to learn about the others. Keep it simple.
To fully understand these orders, you need to know the components of a trade. They are:
First of all, you need a strategy to find a stock. The strategy will require you to have a quality setup and once you find the perfect candidate, you will pick an entry point. The moment you enter a trade, you need to set a stop loss point. That's because not all trades will work out the way you want. Treat the stop loss as an insurance to protect you from further losses.
Then you need to determine an exit point. An exit point is the target. Some trading strategies have target areas. For example, if you trade support and resistance areas you will need to sell your stock as it reaches resistance. Some trading strategies will not have a set target such as trend trading where you just let the stock ride higher. But eventually you will need to take profits.
Now that you understand the components, this is where the different types of stock orders come in.
A market order is when you buy a stock at the current market price. No bargaining. Whatever the price is at the moment, you just pay for it.
Let's go through a trading scenario now.
After you have found a candidate with a great setup, you need to enter the trade. Let's say you saw a great setup like the chart below. This setup is actually one of the stocks that I traded using the Stoch MACD Buy Trading Strategy.
If you are sitting at your trading desk during trading hours and you happen to see it trade above the high of the last bar, you can immediately press the buy market order to buy the stock at the current price.
If I'm not available to watch the stock market but still want to enter the stock, I will submit a market if touched order. I will instruct my broker to buy the stock at market (current price) if the stock touches $13.70 or trades above it. That way I do not need to sit in front of my computer the whole day. The screenshot below is how it looks like in the Interactive Brokers condition order window. Once I create the condition, I press Transmit and the order will be sent to my broker.
Market if touched can also be used to specify a target price to take profits. I can instruct my broker to sell the stock if the stock reaches a certain price. In the case of DDD it would be around $15.50 where resistance is.
A limit order is when you instruct your broker to only buy the stock at the maximum price you specified.
So, for example if I want to buy DDD at $13.70 and not pay more than that, I will just enter a limit order. My broker will only buy DDD at $13.70 and not more than that.
Once I have entered the stock, I want to immediately protect my position and limit my loss. So I might want to put a stop loss at $13.00. That way if the stock drops to $13.00, my broker will immediately sell the stock and keep me from further losses.
The screen shot above shows how I can instruct my broker to sell 500 shares of DDD with a stop loss at $13.00. Once I click Transmit, the order will be send to the broker. GTC stands for good till cancelled. What this means is that the order will remain with the broker until I cancel it.
A good trade management requires you to have:
and you will use these different type of stock orders to help you manage your trades.
So what happened to DDD? The chart below shows how the trade worked out.
Since I sit on my trading desk for a few hours of the trading day, I can easily manage my trades without putting in too many orders. I do not instruct my broker to sell if it reaches a certain price but I will slowly scale out of the stock as it moves higher. But one thing I always do is put in a stop loss order the moment I enter a trade. As the trade moves in my favor, I will move my stop loss order to breakeven. That way, if the stock has a sudden drop I will exit the stock with only a small loss (commissions and slippage) and not the whole loss.
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