Order Types Explained: Market, Stop Loss, Limit, Stop Limit

RagingBullRagingBull ·

If you’re just starting to learn how to trade stocks, you’re going to have to learn how to buy and sell them first. Now, a lot of beginners just start trading just to trade. In other words, they just buy and sell stocks without even caring about the price… and that’s how a lot of traders fail. If you start with the basics and actually learn the intricacies of trading… it helps in the long run. That said, let’s talk about something you’ll need to fully understand when you’re trading stocks or options: order types. Now, we’re going to be going over basic order types here, which include the market order, stop loss order, limit order, and stop limit order.

Order Types Matter When You’re Trading

If you don’t already know there are two sides to a market… buyers and sellers. Buyers bid to buy a stock and sellers offer, or ask, to sell a stock. That’s where the term bid-ask spread comes from. Basically, there is a bid price on the left side and an ask price on the right side of a level I or level II quotes. When you enter an order to buy and don’t set the type… you could be in a world of trouble. For example, some times, during pre-market hours you’ll see wide bid-ask spreads. What happens if you put an order to buy but don’t set the type or price? Well, you would end up taking the offer, and then you would be long shares at that price. The same goes for after hours, or when a stock doesn’t have enough liquidity.

That said, this is one of the foundations you need to learn when you’re getting started trading stocks. Now, let’s look at the most basic order type, the market order.

Market Order

A market order is the most basic order type out there. For example, if you just enter an order to buy, and don’t specify the price… your broker will assume it’s a market order.

Basically, you are buying at the market price. In other words, you would be buying the number of specified shares at the best offer price. On the other hand, if you were to sell shares, you would sell at the best bid price.

For example, let’s say the best bid price is $10 and the best offer price is $10.05… well if you bought at the market, you would pay $10.05 per share. On the other hand, if you sold at the market, you would’ve sold for $10 a share. What happens if you enter a market order to buy a stock, and it’s $10 bid by $11 offer? Well, you would pay the “spread” and take the offer at $11. That can hurt you in the long run. That’s why we stress the importance of knowing your order types.

Now, let’s look at another order type: the limit order.

Limit Order

The limit order type is much better than the market order… and so many traders don’t know how to use this. For example, you can set an order to buy or sell a stock at a specified price. For example, let’s say you enter a Good Til’ Canceled Limit Order to buy a stock a $5.00. Well, your order would not get filled until the stock reaches $5. So let’s say that stock is trading at $5.50, and you want to buy it on a pullback… well, you can set a Good Til’ Canceled Limit Order to buy at that price… you can also set a Day Limit Order to buy at $5.00. With a day order, if your limit order is not filled by 4:00 PM EST, your order would be automatically canceled by the end of day.

Now, keep in mind, the limit order type is not guaranteed to get filled. On the other hand, the market order type guarantees a fill. That said, the limit order type is useful if you care about price, but don’t care about speed.

For example, Jeff Williams trades penny stocks… so he really needs to enter limit order types because price matters, but speed doesn’t matter. By using his strategies and the help of limit orders, and stop loss orders (which we’ll go over next)… he was able to generate returns like these:

order types pnl

Learn More About Order Types and How to Get Big Gains From Small Accounts!

Next, there’s the stop loss order.

Stop Loss Order

Now, a stop loss order allows you to control your risk. For example, let’s say you’re long 5,000 shares of a stock at $0.50… and you only want to risk $500 on this trade. Well, you could set your stop loss at 41 cents. That said, if the stock reaches 41 cents, your stop loss order would be triggered. Thereafter, it turns into a market order… and you would get filled at the next best bid. Chances are, you would get filled at 40 cents.

Not only that, if you use technical analysis to trade, like Jeff Williams and Jeff Bishop do… then you can time your exits, in case things go sour. For example, you can set a stop loss order at a resistance level.

Moving on, there is the stop limit order type.

Stop Limit Order

Now, the stop limit is similar to the stop loss order. However, you can also use this order type to buy stocks as well. For example, let’s say you’re a momentum trader… and you only want to buy stocks when they break out. Here’s a look at where the stop limit order would have been useful. If you look at the price action in the yellow highlighted area… you could have bought in that area for a break out. This is known as a break out pattern, which Jason Bond teaches to all Millionaire Roadmap clients.

Stop Limit Order, Stop Loss Order

Well, there are two components to a buy stop limit order. First, there is the trigger price. For example, you could have put a trigger price at $1.10 here. That said, your limit order would not get triggered unless the stock reaches $1.10. Remember, with a limit order, you have to set the price to buy. With a buy stop limit order, the limit order portion must be higher than the trigger portion of the order. That said, you could have put a limit order at $1.15.

You can see how much easier it becomes when you learn order types.

You can set your buy stop limit orders… once you get filled on that, you can set a stop loss order, and a limit order to sell at your target price. Now that you know these order types… you have to learn strategies to trade. If you want to trade options, you can learn from Jeff Bishop at Weekly Money Multiplier... if you’re interested in learning how to trade penny stocks, then you can look to Jason Bond or Jeff Williams… if you want to learn a diverse set of tools and snipe the markets… then Kyle Dennis would be a great fit too.

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