When you first start trading, you’ll hear a lot of “industry” terms being thrown around. If you’re reading articles or in a trade room on a regular basis, you know that people rarely take the time to explain exactly what all this lingo means. In this first article, we talk about types of orders and how they are classified. Feel free to save this list as a handy guide (until you memorize them all, you genius).
- Limit order: A limit order is one that guarantees price, but not execution.
- Market order: A market order is one that guarantees execution at the current market price, given its priority in the trading order book.
- Stop order: Also referred to as a stop-loss order, is your risk management tool. A stop is used to trigger a market order to exit a trade if price trades against you.
- Trailing Stop Order: A stop-loss order that trails price in order to eliminate risk and to protect profits. The trailing stop price is adjusted as the price fluctuates and acts a market order for risk management.
- Day Order: An order that remains open until the end of the trading day and then is canceled by the broker/trade floor.
- Good Till Canceled (GTC) These orders are also known as ‘open orders’. This type of order is always working on the floor of the exchange unless it is executed, canceled by the client, or replaced by another order. When you place an order with a broker, it is assumed a day order and will expire at the close of that markets trading day. If you wish to have an order working beyond the day you place it, you must specify it to be GTC.
- One- Cancels-Other (OCO): A pair of orders stipulating that if one order is executed, then the other order is automatically canceled. An (OCO) combines a stop order and limit order. When either the stop or limit level is reached and the order is executed, the other order will be automatically canceled. Traders use OCO orders to mitigate risk and plan trades in advance.
Another common industry term you might hear is trading “long” or “short”. These terms refer to the position you will need to be in to take advantage of a directional move.
Long trades (Look for price to rise)
When we take long trades we are actually buying the security with the outlook of capital appreciation. First, you’ll purchase the security. Then, you wait for it to increase in value. We then sell the security at a higher price than what we paid for it. Your profit is the difference between what was paid and what we sold the security for.
Short trades (Look for price to decline)
When we take short trades we are actually selling the security with the outlook of capital depreciation. In essence, we borrow the security from our broker. Then, we sell it immediately to collect money which is held in out account. When price declines, we buy the security back at a lower price and return it to the broker. Our profit comes from the difference between the price we sold them for and the price we paid to buy them back. Our broker only cares about us returning the security.