The world of day trading can be both fun and highly profitable. But before a new trader can start turning a profit or even begin trading, they will need to learn the three basic order types. Each of these orders are highly important to trading and can make or break a trade depending on how you use them. Today, we are going to learn more about each order.
One of the most popular orders that most day traders frequently use are stop orders. This order type will allow you to get in and out of a trade with ease. When placing a stop order, you are telling the trading platform what price you want to get in or out. When that price hits the order, it will turn into a market order and is executed at the next available price. Stop orders are used by traders who want to protect long or short positions. Some traders use stop orders to trade breakouts and will set the order to buy just above the line of resistance.
Limit orders are also very common in the trading world. A limit order simply tells the market that you are willing to buy or sell a particular security at a specific price. This allows traders to get in at a price point they feel comfortable with without having to place the order directly.
Limit order is great for active traders who are trading more than one security at a time. But there is one drawback to limit orders. If the price of the security you are trying to buy stays higher than your limit, then your order will not be filled. A sell limit order, on the other hand, will only get filled at your set limit or higher.
This type of order is used by active traders that want to jump in or out of a trade at whatever the current market price is. This is a direct order that is normally executed and filled quickly. If you like to get in and out of trades quickly, then a market order is your best bet.
But just like other orders, a market order has its faults and one of them is called slippage. Slippage is often seen in stocks that don’t have a lot of liquidity in the market. Since only a few of these shares are trading at the time of your order, all of them may get bought up before your order is filled. Seconds later, more shares may become available but at a higher price which can cut into your profit margin.
As you can see, these three order types can really help you turn a profit. Always remember that they have their downsides as well. But with enough practice and the right trading strategy, these orders can be used to your advantage. Also, keep in mind that each order has its own purpose, and learning how to use them before you start trading with real money is highly important.