A market order represents the most basic type of trade order and implies buying or selling a security at the current price. Securities are bought at the ASK price and sold at the BID price. If the trader needs to get into or out of a trade, a market order is the most reliable method. However, slippage can occur, a trade execution at a less favorable price, thus market orders should only be used to enter trades when there is good liquidity in the market.
A pending order is an order which is executed in the future at a pre-defined price. When price reaches certain level, trade is executed. There are four types of pending orders:
- Buy Limit– a trade request to buy at the “Ask” price that is equal to or less than that specified in the order. After having fallen to a certain level, trader anticipates security price will increase.
- Sell Limit – a trade order to sell at the “Bid” price equal to or greater than the one specified in the order. After having increased to a certain level, trader anticipates security price will fall.
- Buy Stop – a trade order to buy at the “Ask” price equal to or greater than the one specified in the order. The order becomes active only after a specified price level has been reached anticipating that the security price will keep on increasing.
- Sell Stop – a trade order to sell at the “Bid” price equal to or less than the one specified in the order. Sell Stop becomes active only after a specified price level has been reached anticipating that the security price will keep on falling.
A Stop Loss order is a tool used by traders and investors to limit losses and reduce risk. An investor enters an order to exit a position he is holding if the price moves to certain level that already represents a loss in the trade. A Stop Loss order takes the emotion out of trading decisions and could be used to protect both long and short positions.
They differ from limit orders which are executed only if the security can be bought (or sold) at a specified price or better, thus your order is guaranteed to be filled at the specified order price or better. The only guarantee if a Stop Loss order is triggered is that the order will be immediately executed and filled at the prevailing market price at that time.
A Take Profit order is a type of order where trader or investor specifies the exact price at which to close out an open position for a profit. If the security rises to the take-profit point, the order is executed, closing the position for gain. The order can be placed only together with a market or a pending order.
Take Profit is best used by short-term traders as they can get out of a trade as soon as their planned profit target is reached. In contrary, traders with a long-term strategy do not favor such orders because it cuts into their profits.