Whether you want to buy or sell, your online trading platform will usually offer you a number of different order types to choose from. Four of the most popular ones are explained below.
A limit order lets you specify a price (called the limit price) at which you want to buy or sell a given asset. The asset you picked will be bought or sold once the price has reached or passed your pre-set limit.
Let's see an example of a limit order. You want to buy Apple stock at a price of $100, but the current price is $110. So what you would do is set a limit buy order at $100, and then once the price falls to $100 or below, the system will buy for you.
There are two types:
- Limit order to Buy = at or below the specified price
- Limit order to Sell = at or above the specified price
How long is a limit order valid?
It’s up to you. There are multiple ways you can set it up. Brokers usually offer one or more of the following options:
- 1-day: valid until the end of the trading day
- GTD (Good Till Date): valid until a given date, unless already fulfilled or cancelled
- GTC (Good Till Cancelled): valid until cancelled, unless already fulfilled
Do limit orders cost money?
No, they won't cost you money. This is a basic function at all brokers; in fact, it's one of the reasons they exist: to allow you to set such orders.
How do you set it up?
Go to the trading platform and look for the order execution interface. You can set up a limit order when you purchase the product, similarly to stop-loss orders.
A market order is the most basic and default option you can select; it means your trade is executed at the current best price. A market order is the best choice if you want your order to be fulfilled immediately.
Once your market or limit buy order is executed and you have an open position, you'll probably want to both secure your profits and minimize your losses, depending on how the market turns. This is what stop orders are designed to do.
A. Secure your profit
The stop order for securing your profits is usually called a take-profit order (T/P).
This example will help you better understand take-profit. Let's say you buy an asset at $100 and decide you'd be happy with a $25 profit. What you then need to do is set the take-profit level to $125; so that once the price reaches $125, your position is closed and you take your $25 profit.
B. Minimize your losses
The stop order for minimizing your losses is usually called a stop-loss order (S/L).
Here is another example. You buy an asset at $100 and decide you can't afford a loss of more than $25. In this case, set the stop-loss to $75; and if the price ever decreases to $75, your position is closed and you get away with a $25 loss.
When the market is volatile and prices drop or rise very quickly in big leaps, it can easily happen that the price plunges past your stop-loss level and, as a result, your position is closed at a much worse price than you intended (as it happened during the Swiss franc shock in 2015). To protect you against such cases, some brokers provide a guaranteed stop order. This means that your stop-loss order is executed exactly at your stop-loss price, even if the actual market price was lower. Brokers charge a fee for executing guaranteed stop orders.
Let's see an example of how guaranteed stop orders work. You buy an asset at $100 with a guaranteed stop at $75. If the price decreases suddenly from $100 to $50, your position will still be closed at $75.
Learn more about this order type from our How to manage stop-loss orders article.
Sometimes the price of an asset you hold jumps so much that it triggers your stop order for closing your position, but after a few minutes it reverses course and moves back closer to the original price level. For such cases, a stop-limit order is useful.
The stop limit is a stop order with the added feature of triggering a limit order once the stop price is reached. When you use stop limit, you have to set two prices:
- Stop price: the price which triggers closing your position.
- Limit price: the price below which you don't want your position to be closed.
Here's how stop limit works. Let's say you buy an asset at $100 and set a stop price at $75 and a limit price at $70. Once the price falls to $75 or below, the system will start selling, but it will stop selling once the price drops below $70.