Understanding Different Order Types and How To Use Them Correctly
By Tony Golan
Chief Technical Analyst
StockProfit.com™
Market Orders
"Buy 100 XYZ @ market" means "Buy 100 shares of XYZ, execute immediately at the best available price". Here, the emphasis is on "immediately". The "best available price" is pretty much lip service. They can always argue that the price you got was the best available at the time. Beware of buying at the market a stock that is going up sharply on news that just broke out for you can end up paying dearly (as in the high of the day). People that buy at the market often have no real plan and are usually acting on emotion. How do you know if someone has no trading plan? It's simple. Just ask them where their stop is. Any answer other than an exact price of where their stop is set means they have no plan. "I'll just watch it" means they have no plan. "I have a mental stop at such and such" means they have no plan.
"Sell 100 XYZ @ market" means "Sell 100 shares of XYZ, execute immediately at the best available price". This order is actually ok when you're taking profits. Sometimes, after a stock has been going up for a long time and then gives you a clear bearish-reversal signal, it's time to cancel the sell-stop and sell your stock at the market at the open the next day. Selling at the market when it's not at a profit could also be a clear sign of a trader without a clear trading plan. Getting out at a loss should be done by a sell-stop order.
Limit Orders
For the limit example, assume XYZ is currently trading at 55.00.
"Buy 100 XYZ @52.00 Limit GTC" means "Buy 100 shares of XYZ @52.00 or lower and keep the order open until it's either executed or I tell you to cancel it". A buy-limit order is always an order to buy below the current market price. Using buy-limit orders means you will buy a stock that's going down, because it always has to come down to your limit price or lower. I never use buy-limit orders because I always buy stocks when they go .02 above the high of the buy-signal day. As a rule, I don't buy and I don't want to buy stocks that are going down period.
"Sell 100 XYZ @60.00 Limit GTC" means "When XYZ gets to 60 or higher, sell it at 60 or higher, and keep the order open until either it's filled or I tell you to cancel it". Sell-Limit orders are always above the current market price. I don't use sell-limit orders, because high-RSD stocks are trending up, and that means they keep breaking new highs, and making higher lows when they correct. When stocks trend that powerfully, you never know how high they're going to go. That's why in my opinion it's best to set a stop and let the market take you out when the up-trend is over. Don't get in the habit of guessing how high an up-trending stock will go. It's a futile effort.
Stop Orders
For the stop order discussion, consider the chart below.
 Zoom
TRID had just gone from a low of 7.89 to a high of 11.65. It then pulled back to a low of 10.58, then reversed back up with a bullish reversal pattern and above-average, rising volume. The high on the signal day was 11.18. We now want to buy TRID if it trades .02 above the high of the signal day. That means we want to buy TRID when it trades at 11.20 or higher.
"Buy 1000 TRID @11.20 Stop GTC" means "When TRID trades @11.20 or higher, buy 1000 shares at the market, and keep the order open until either it's filled or I tell you to cancel it". A buy-stop order is always placed above the current market price of the stock. Once the stock trades at or above the buy-stop price, your order is triggered and becomes a market order, to be executed immediately at the best available price. This order fits my trading strategy much better, but it can still be improved.
Since TRID just pulled back and made a low of 10.58 before turning back up, we expect it will continue to trend higher and make new highs without first going back below the low of 10.58. If the stock goes back below 10.58, it will establish a pattern of lower highs and lower lows, which will invalidate the up-trend we were expecting to continue. In other words, if TRID goes below 10.58, it needs to be sold quickly. It's ok to be wrong, but it is not ok to stay wrong.
"Sell 1000 TRID @10.53 Stop GTC" means "If and when TRID trades at 10.53 or lower, sell 1000 shares at the market, and keep this order open until either it's filled or I tell you to cancel it". A sell-stop order is always placed below the current market price of the stock. Once the stock trades at or below the buy-stop price, your order is triggered and becomes a market order, to be executed immediately at the best available price. When you're selling a stock that's going down, it needs to be sold quickly.
Right now would be a good time to point out that a sell-stop does not protect you from a disaster gap-down. If we buy TRID @11.20, and set a good-till-cancelled (GTC) sell-stop @10.53, and the stock open the next day at 8.00, our sell-stop @10.53 does us no good. In that case, the stop will trigger, and the stock will be sold at the market, which will be around 8.00. This is exactly the reason to only concentrate on stocks with high RSD as they tend to gap-down less than stocks with low RSD. Gaps are the trader's worst nightmare.
Sell-Stop-Limit Orders
The sell-stop-limit order can be confusing at first. A sell-stop-limit order gives you two prices, the stop price and the limit price. The stop price is the price that triggers the buy or the sell, and the limit price indicates up to what price the trade can be done. For the sake of this example, we'll continue using the TRID example with TRID giving an intermediate-term buy signal at 11.20 with a GTC sell-stop at 10.53.
Using the TRID example, we want to buy it the next day at 11.20 stop GTC. However, consider this. What if we place an order tonight to buy TRID tomorrow @11.20 stop GTC, and in the morning the company announces some news and opens 6 points higher? At that point, our buy-stop will kick in, but since the stock opens at 17.20 instead of 11.20, our buy-stop becomes a market order and we buy the stock at 17.20. Now we have to place the same sell-stop @10.53 and have a 6+ points stop in the order of 38%! And please don't tell me I'm being too cautious. This has happened to me before.
You have to protect yourself from mishaps like that. The solution is the buy-stop-limit order.
"Buy 1000 TRID @11.20 Stop 11.70 Limit GTC" - means "When TRID trades @11.20 or higher, buy 1000 shares at the best available price but don't pay any more than 11.70 for it, and keep the order open until either it's filled or I tell you to cancel it". We give it a half-point above the buy-stop price for stocks under 20, and a point above the buy-stop price for stocks over 20. If the stock is going to gap-up above the limit price, we'll stand to the side, but buy it if it comes back to the limit price.
The common pitfall associated with buy-stop limit orders is when a person specifies the same price in the stop and the limit fields of the buy-stop-limit order.
"Buy 1000 TRID @11.20 Stop 11.20 Limit GTC" means "When TRID trades @11.20 or higher, buy 1000 shares at the best available price but don't pay any more than 11.20 for it". BEWARE OF THIS ERROR !!! That's asking the stock to go up to 11.20, trigger your order but drop back below 11.20 momentarily, so you can save a few pennies on the buy price. That's asking a lot of the market, and the net result of it is the stock most often ends up going up without you. I'm afraid the market is not THAT accommodating.
What's even worse than that is the error associated with the sell-stop limit. The sell-stop price is the price the stock has to drop through to trigger the order. The limit price is the minimum price you will accept for the stock. DO NOT USE SELL-STOP-LIMITS. A limit price is always placed above the market price, and a sell-stop is always below the market price. In effect, you're asking a stock that's dropping to momentarily rebound a certain amount just so you can get out with a little less pain. Here's what can happen, continuing to use the TRID example.
"Sell 1000 TRID @10.53 Stop 11.00 Limit GTC" means "When TRID trades at 10.53 or lower, sell it at 11.00 or higher, and keep the order open until either it's filled or until I cancel it". This is too unrealistic. When you should be selling and running for cover, you're now risking losing everything just to lose a little less. Using orders like that is like not having a stop at all, and that's usually the net result of orders like the one above.
However, the most common trading error associated with the sell-stop-limit order is specifying the same price for the stop and the limit fields of the sell-stop-limit order.
"Sell 1000 TRID @10.53 Stop 10.53 Limit GTC" means "When TRID trades at 10.53 or lower, sell it at 10.53 or higher, and keep the order open until either it's filled or I cancel it". Again, that's being unrealistic, or not understanding this type of an order. The net result of this type of order amounts to not having a stop at all. I have seen too many trading accounts get destroyed when the stocks went through the stops and kept dropping without ever coming back above the limit prices, and kept dropping. I have seen this happen for years and I want to discourage you from using sell-stop-limit orders.
Applying Different Order Types with Intermediate-Term Trades
To summarize, to enter, I use a buy-stop limit order, with the buy-stop .02 above the high of the buy-signal day. For stocks under 20, I set the limit price .50 above the buy-stop price. For stocks over 20, I set the limit price 1.00 above the buy-stop price.
So, for entering TRID, the order would for Momentum Stock Trader subscribers read "Buy TRID @11.20 Stop 11.70 Limit GTC". We will buy it when it goes above the horizontal green line on the chart.
Zoom
The above chart shows the price action the next day. TRID went up through the buy-stop price without gapping up and we bought it at 11.22.
Then, we immediately entered a GTC sell-stop order .05 below the corrective low. The actual instructions to subscribers to my Momentum Stock Trader service were "Sell TRID @10.53 Stop GTC".
Zoom
The chart above shows what happened after we got in. TRID soared up to a high of 17.85 over the next few weeks. When it started pulling back, it was most likely to make a higher low and turn back up to new highs. TRID pulled back to 16.42, then turned back up. Now I instructed my subscribers to raise their stop to 16.37, .05 below the new, higher low. The actual order read "Sell TRID @16.37 Stop GTC".
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A few days later TRID dropped below the sell-stop and stopped us out of the trade at 16.40 for a 46% gain in just under two months. Now TRID made a lower low and the previous corrective low did not hold.
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