There are many more order types for stocks than most traders realize. Most traders are familiar with the MARKET order type and also the LIMIT order type, however using just these two most common stock order types leaves you at a huge disadvantage to other traders who understand and use more advanced stock order types.
In thig blog you will learn 9 order types in stocks that you can use to get the best result from your stock trading system. You will learn about the following stock order types:
- The liquidity of the stock you are trading
- How urgently you need to buy or sell
- Whether you need 100% certainty that your order will be executed
- Whether you need 100% certainty of the price your order will be filled at
- Which markets you are trading
- Which order types your broker supports
I use Interactive Brokers who support all of these stock order types (and many more) and so if you find your broker only supports the market order type and / or the limit order type then it is probably time to rethink your broker because there are far more order types in stocks than just MKT Orders and LMT orders.
As I have previously written, stock order types are not as simple as buy and sell – there is much more to it. After reading this post you will know how to choose the right stock order types to get the best result for your situation.
Market Order – What Is A Stock Market Order?
The market order is probably the simplest of the order types in stocks. It is simply an order made to buy or sell at the best obtainable market price. When you place a put in a buy order ‘at the market’, your order will immediately be placed into the market and will start executing at the price of the lowest seller. If there is sufficient selling volume available at that price then the order will be filled.
If, however you place a buy at market order and there is not sufficient volume at the asking price to fill your order then your order will first take the available volume at the asking price, and then it will move up to the next price step and see if there is enough volume to complete the order there. If there is still insufficient volume it will take the shares on offer at that level and then move up to the next level and so on.
This is illustrated in the diagram below that explains ‘What is a Market Order?’
The Advantage of Market Orders
The market order type has 4 huge advantages which make them extremely popular for stock traders:
- Availability: Most brokers have market orders so you can almost always use them*
- Simplicity: All you need to do is specify Buy or Sell and the Volume and your order is complete
- Certainty of execution: With market orders you can be 100% confident that your order will be filled
- Speed: When you want your trade executed in a hurry, the market order type is best because it executes immediately
* Be aware that some brokers say they have market orders, but what they really offer is ‘market to limit orders‘ which are explained later in this post. These are quite different things and in my opinion it is quite misleading and irresponsible for brokers to mislead their traders this way, but it does happen! Make sure you read the fine print and see if your broker does offer real market orders or if they limit you with market to limit orders (pun intended).
The Disadvantage of Market Orders
Market orders really suffer when the liquidity of the stock you are trading are low, if the market is highly volatile or if your order is large relative to the market.
If the spread is wide and you put in a market order to buy, your order will hit the lowest offer. You will pay at the top of the spread to buy, but if your order is bigger than the volume that is at the lowest offer, then it will keep moving up. It keeps increasing until it finds enough volume to fill your order.
The disadvantage is that you don’t necessarily know at what price it will get filled. If your stock is highly liquid, like when you are buying Apple at a certain volume, Apple’s daily trading volume is vast; the spread is tight. Then you can place a market order, and you will get the current price.
But if you are buying some tiny little small-cap stock that does not trade very often, and you place a Market order, the spread could be wide, and you could hit the lowest offer and then move the price up several price steps until it finds enough volume to fill your order. With Market orders, you will get filled, but you don’t know what price, and you can suffer from a lot of slippages.
When to use Market Order
You don’t always want to use a market order. If the stock is very liquid and your trade is small, it’s fine, usually. But if the stock is not very liquid or your trade is big, then you want to be more careful.
If you place a Market order before opening the market, it usually gets executed immediately as the market opens; you get the opening price, assuming your order is not so large that it moves the stock price.
Limit Order – What is a Limit Stock Order?
The next type of order is a limit order, which is probably the most popular order type in stocks. A limit order is an order placed to buy below the current market price or a sell order placed higher than the current market price.
The purpose of limit buy order is to ensure you only purchase the stock at a certain price level or better. The purpose of a limit sell order is to ensure you only sell your stocks when the price gets above a certain specified level.
Explanation of a Limit Order
A limit buy order is used in a situation where one wants to buy at a certain price or better, if the current stock price is $50 and you have put in a limit buy order for $49, you will only get filled if the price drops to $49. You will not get filled at $49.5 or $50.
If the price opens below your limit order, at say $48 in this example, you will get filled at the opening price, typically, or somewhere in between if there is a bit of slippage. However, you will not pay worse than your limit price ( $49 in this example).
The execution of a stock limit order is illustrated in the diagram below.
Benefits of Limit Orders
The advantage of a Limit order is obvious. You know exactly what price your order will get filled at. Limit orders are not subject to slippage and so your can place a large limit order without worrying that you will move the market with your order.
Another advantage of the limit order type is that you can place your order well in advance and leave your order in the market until it gets filled. For example if you are using a stock trading system that has a profit target, you can place a limit order at your profit target level and specify that the order is ‘good till cancelled’ and it will remain active in the market until it is executed.
Disadvantages of Limit Orders
The main disadvantage of stock limit orders is that you do not know your order will get filled. As illustrated in the diagram below, if you place a limit order to buy at $49 and the price only drops to $49.01 then your order will not be filled! For your buy limit order to get filled the price must trade all the way down to your limit order level or better for your trade to be filled.
This is a risk if you are using an end of day stock trading system that enters on the open the day after the signal. If you place a limit buy order the night before hoping to get filled at the open and the price gaps above your limit price and keeps trading higher from there then you will not be filled and you will miss the trade.
This disadvantage of limit orders is illustrated in the image below:
How to Place a Limit Order
If you have an end of day trading signal and you want to enter at the open the following day, you can give yourself a fighting chance of having your order filled by placing the limit above where you think the market will open, based on what you can see from the buyers and sellers just before the market opens.
If the buyers (bids) and sellers (asks) overlap just before the market opens then you can place your limit buy order towards the top end of the overlap. Then you will likely get executed with that limit order. Unfortunately placing limit orders like this is not foolproof as you can still miss the trade if the stock happens to open higher than your order level. If you don’t get executed right at the open with that strategy, then you might need to move your order. Also, you will suffer a little bit because you have to chase the price up.
Meanwhile, the limit order is good when your position is big relative to the market. Your position should never be huge relative to the market because because it will be difficult to get the entire order filled, but if your orders are on the larger side then using limit orders rather than market orders is a much better strategy.
The smaller cap the stock, the lower the liquidity, and the bigger your trades, the more slippage becomes an issue. Thus, it is better to use the Limit order more instead of Market orders in this situation.
Market-to-Limit Order – What is a Market To Limit Order?
Market-to-Limit is another useful stock order type. It is simply placing an order made to execute at the present best market price. It addresses some of the disadvantages of limit orders and market orders because it is a combination of the two order types.
Explanation of Market-to-Limit Order Type
When you place a market to limit order to buy a stock, the order goes into the market and buys at the lowest offer (ask) price. The order will buy whatever volume there is at the lowest offer (up to your order volume) and then immediately convert to a limit order at that price. It hits the ask price then converts immediately to a limit so that you don’t get slippage.
Market-to-Limit order doesn’t keep chasing up to fill its whole volume as a Market order does. It hits the price then converts it immediately to a limit so that you don’t get slippage.
Benefits of The Market-to-Limit Orders
The advantage of market-to-limit order is that you don’t need to guess what level to place your order at to get at least part of the order filled. Because the MTL order to buy goes into the market, hits the lowest asking price and then converts to a limit at that level, you know at least part of your order will be executed immediately.
The second advantage is that once the order is in the market, you don’t get slippage. There IS some slippage inherent in the MTL order type because the order ‘crosses the spread’ and hits the ask and converts to a limit (for a buy order, opposite for sell orders), so you always end up paying the spread, however you don’t get slippage beyond the spread like you do in a market order.
Disadvantages of Market-to-Limit Orders
The disadvantage of a market to limit order is that you may not get a complete fill because there may not be enough volume at the edge of the spread for your order to get filled, so the remaining volume of your order will convert to a limit order at that level. If the price never returns to that level then you will only have a partial fill of your order.
A Market-to-Limit can help ensure you get in at the price you want, at least partially. You don’t have to guess what level to put your limit. The only slippage you will suffer is the spread. If the spread is wide, you will hit the lowest offer. You will also pay the full spread. If you place a normal limit order, you could place it inside the spread or the top of the lineup of buyers so that you can wait to see if someone will come down, hit your order and get you filled. But with a market to limit, that doesn’t happen, you go straight there, and then it converts to a limit at that level.
Stop Order – What is a Stop Order Type in Stocks?
A stop order type is an order that will get executed if the market moves in an unfavorable direction beyond a certain level.
The Stop order’s typical use is as a stop-loss to get you out if a trade is moving against you. For instance, you entered the trade at $52, you place a stop-loss at $49 to get you out of your trade if the price moves against you.
If the price comes down and touches $49, that stop-loss is triggered, and your sell order is dumped into the market as a market order immediately. It then converts to a Market order, which is active, and subsequently chases the buyers down until your sell order gets filled.
A Stop order suffers the same slippage issues as a Market order; a stop order is just a market order that is not active until the price hits the specified level. Thus, if it’s a stop-loss, like in the diagram below which is a sell stop at $49. When the price hits $49, it converts to a market sell order at $49. If there are enough buyers lined up at $49, then your order will get executed there. But if there are not enough buyers lined up, it will keep moving down until it’s soaked up all of your order. Hence, that’s the slippage that you get.
The Benefits of a Stop Order
Using stop orders have some great advantages for stock traders. The most significant benefit is that the stop order type gives you a way of limiting your risk and automatically cutting your losses if a trade moves against you. If a stop order is triggered, it will be filled with 100% confidence. So as a risk management method stop orders are really powerful and pretty much all traders should be using them.
Disadvantages of the Stop Order Type
Since a stop order actually converts to a market order when it is triggered, the stop order type has the same disadvantages as the market order type.
Just like a market order, you don’t know what price you will get out at because stop orders are subject to slippage once they are triggered. If it’s a highly liquid stock, you will probably get out at your stop-loss level or very close to it. If it’s not a liquid stock, you are going to push the price down and get some slippage.
A Stop-Limit order is a variation on the Stop order which, as the name suggests, combines elements of the stop order type and elements of the limit order type. Stop limit orders attempt to deal with the slippage problem that standard stop orders incur.
Stop limit orders are just like a Stop order in that they are not active until the stop level is triggered, but when it is triggered the stop limit order has a price limit attached to it. This means you can have a stop, but restrict the worst case slippage that you are going to get by placing a limit at the worst price you are willing to tolerate.
For instance, you enter the trade at $52 as illustrated in the diagram below, and you place your stop at $50 with a limit of $49. If the stock price hits $50 then your stop limit is triggered, and it goes into the market. Your order will be executed like a market order, however if the price falls below your limit level ($49 in this example) before the order is filled your trade will not be executed. Thus, you can limit the slippage quantity you are willing to tolerate by using a Stop-Limit order.
Benefits of a Stop-Limit Order
The advantages of the stop limit order type are that you can set a stop loss but also simultaneously limit the amount of slippage you will incur if the market moves quickly of liquidity is low. If your order is large relative to the market then you will not cause a massive spike down if the volume happens to be thin when your Stop order gets triggered.
Disadvantages of a Stop-Limit Order
The disadvantage of the stop limit order type is that you may not get out when you should because your limit gets hit and you are still not filled, and so you remain stuck in the trade. Also, if the trade keeps going south, then you will keep losing money.
Thus, just like there is a trade-off between a Market order and a Limit order, there would be more slippage with a standard stop order but greater certainty of getting your order executed. A stop limit order has more certainty of price, but a lower certainty of being executed.
A Stop Order versus a Stop-Limit
As discussed earlier, a stop order has more slippage risk, while a stop limit order has more execution risk.
For my stock trading systems that have in market stop losses, I generally don’t use Stop-Limits; I use Stop orders because if my stop loss level gets hit I want to be out of the trade to protect myself.
For many of my systems I use a mental stop with the next buy on open exit rather than a stop order or a stop limit order. I find that I get less slippage that way and generally better prices. However, you have to backtest and see that for yourself.
If you want to have a Stop-Loss in the market, you need to understand that Stop-Loss, when it’s triggered, turns into a Market order, which can cause some slippage. You can reduce your slippage risk by using a stop limit order type, but that then introduces execution risk.
Trail Order – What is a Trailing Stop Order?
A trailing stop order is used to progressively lock in your profits as a trade moves in your favour. This is commonly used in stock trend following systems.
For example, lets say you enter a stock at $50 and you then place a 4% trailing stop order to close your position. This means that if the stock drops to $48 (4% below your entry price of $50), then the trail order will be triggered and placed into the market as a sell at market order.
If the stock price moves up from $50 to $55, the trailing stop will now be set to $52.80 (4% below $55). So if the stock then drops from $55 to $52.80 it will be triggered and placed into the market as a sell at market order.
I would not use a trailing stop as tight at 4%, this is just an example for the purposes of explanation. In end of day stock trend following, a trailing stop in the range of 20-30% generally works very well, however you should backtest this yourself using stock trading software like Amibroker.
Advantage of Trail Order (Trailing Stop Order)
The trailing stop order type is useful if you want to do a very low maintenance trend following. For instance, you want to do your buys, place them in the market, and then have a 25% trailing stop which automatically follows the price up and hangs 25% below the highest price since entry. If the price falls then the trailing stop stays constant and is triggered if the trailing stop level is hit. If that backtests well and works in your market, then that’s a super low effort way to trade.
Disadvantages of a Trail Order (Trailing Stop Order)
Just like stop loss orders, you can get some slippage with trailing stop orders. If you are using trailing stop orders then you should probably have a fairly high liquidity filter and/or small positions to ensure your slippage is low.
With Interactive Brokers, you can set the trail as a percent or a certain point distance (dollar distance). A point distance shows that, for instance, you buy a stock at $10. You might have a $1 trailing stop order. If the stock goes up to $11, then the trail is now at 10. If it goes up to 15, the trailer will be at 14 because it is always $1 down from the highest price since entry. You can also set your trailing stop order as a percentage so that as the price goes up, the order stays a constant percentage down from the highest price since you entered the trade and placed the trailing stop order.
If you want a low maintenance way to follow the trend, that can be useful, ensure you backtest what you trade, and trade what you backtest. Because when you backtest a trailing stop in any broker, you can backtest a percentage trailing stop very easily. Also, you can mirror that in Interactive Brokers. But if you backtest an ATR based trailing stop, you can’t mirror that in Interactive Brokers exactly.
At least you can’t mirror a dynamic ATR stop. You can mirror an ATR based stop where you calculate the ATR at the entry and then keep it constant for the life of the trade. That would mean for the apply stop function you would set it to “Volatile=False”. Unfortunately that type of trailing stop does not perform particularly well, so you will probably be better off using a percentage trailing stop.
Adaptive Order (Specific To Interactive Brokers)
An Adaptive order is one of the Algo order types specific to interactive Brokers. It selects and varies the price to attempt to fill at the best all-in price.
The Adaptive order from Interactive Brokers looks at the volume of buyers and sellers and algorithmically manages your order between the bid and the ask to try to achieve the best outcome. For example, you want to buy 10,000 shares; it will start by putting the limit order inside the bottom end of the spread at the bid price or one step above the current bit. It will then wait for just a little bit to see if anyone would come down and hit your order. If no one comes down and hits your order after a little while, it would consider moving the order up. Thus, it basically ratches it up just a little bit and see if anyone will come down to that level and then ratches up a bit more and see if anyone will come down to that level.
It’s testing the market between the bid and the offer. Thus, making you avoid going straight up to the lowest seller. It will instead start down, and hopefully, you can get a better price. It often improves the price relative to a Market order.
The Adaptive Algo order allows you to specify either a market or a limit order, so you can control the worst case price with a limit if you want to, or you can ensure your order is executed by making it a market order.
There is also an option for how urgently you want your order executed. This determines the speed with which the algo order adjust the price to get it filled. Order settings are Urgent / Normal / Patient. The more patient you set the order, the more likely you will get price improvement relative to a straight market order, but also the more likely you could miss the trade if the price moves rapidly.
I use Algo orders all the time because they allow me to ensure execution with a high degree of certainty by using the Market order setting, but they dramatically reduce the slippage and improve the price relative to the straight market order type.
I am in Australia, and let’s say I’m placing a trade on the US market after I want to be asleep in Australia. I just put in an Algo order to buy or sell and just let the algo manage my order for me. Usually, the outcome is very good.
What is a Close Price Order or Market on Close Order?
The next order type is called Closed Price or Market on Close. It’s useful because you can backtest your systems entering or exiting at the closing price if certain things happen. For example, let’s say you have a system that enters at the close, if certain conditions are true, and you want to match that, but without having to be there right on the close – The Market On Close order type will help you achieve exactly that!
It’s very hard to get the exact closing price because it’s precise. If you miss the close, then the market’s closed; you can’t get in or out until the next day. Thus, what the Close Price order does is that it takes your order before the close, splits it up into little pieces and throws the pieces into the market one after another as Market orders just before the close, trying not to move the price too much because it’s making the orders smaller and spacing them out over the last few minutes of trading.
If you dump one big market order in the market just before the close, chances are you can move the market and cause slippage, getting a terrible fill price. The market on close order reduces this problem!
It aims to get you out or into your entire position as close to the closing price as possible. That’s a good way to implement a system where you have tested an entry or an exit at the Close Price instead of the Open.
Dark Ice Order (Iceberg Order)
The final stock order type is called Dark Ice order. Dark Ice (an Algo order) which is also known more broadly as an Iceberg order. This sounds like it is something that only big hedge funds would benefit from, but even in my own personal trading, I have seen very substantial benefits from using Dark Ice orders (Iceberg orders) instead of straight limit orders.
How Do Iceberg Orders Work?
You want to buy like 50,000 shares. You tell the order how much of that order you want to be visible in the market. If you have 50,000 shares that you want to buy / sell, you tell it to make 5,000 shares of the order visible and hold the rest of the order back out of the market. It will put an order for roughly 5,000 shares (Interactive Brokers randomises the number of shares made visible so it is less obvious) in as a limit into the market and wait until that’s filled. As soon as that’s filled, it will put another ~5,000 in, and then another ~5,000 when that’s filled, until it’s all filled.
The Advantage of Dark Ice Orders
The awesome advantage of it is that if you were trying to buy 50,000 shares, and you put 50,000 shares in, there are chances that a bunch of little traders are going to see your order and treat it as a temporary ‘support’ level, and stack their orders up on top of your bigger order. This push the price up just a little bit away from your limit order because they are using you as a temporary support and it makes it less likely that your order will get filled.
Even as a private trader you can move the market if you are not careful. Placing a large limit order visible in the market does exactly that – if your order is big relative to the market. Thus, what happens is your big order moves the market, which means you have to chase it, you end up getting a worse price.
Your order’s presence in the market has caused the market price to move, which has caused you to suffer slippage if you want the order to get executed. When you start having to chase the price you will need to hit the other side of the spread to get your order executed because of all the people jumping on top of you.
The way you avoid it (that is, instead of putting your whole 50,000 in, if that’s your order), is to get IB to do a Dark Ice order. The Dark Ice Algo puts in 5,000 or 1,000 shares at a time (depending on what you specify), it will place it and get the first bit filled. Then it’ll place the next bit and get that filled as well. Because you are not putting one big order into the market, no one sees a big order; thus, no one starts stacking on top of you. It’s useful in small stocks or if you find yourself in a position where your order is big relative to the depth.
The iceberg order type has saved me many thousands of dollars of slippage – I highly recommend it instead of limit orders if you have a larger account!
The Disadvantage of Dark Ice Orders
It’s a limit order and might not get executed in full. You might have to move the limit price. It is also a little slower than a normal limit order, so there is a slight additional execution risk compared to a standard limit order… although in my view the price benefits far outweigh the slight increase in execution risk.
Conclusion on Order Types
That sums up trading system order types in stocks. There are quite a number of other stock market types of orders, but these are common ones that I use a lot and have found very valuable. Each stock broker may have slightly different order type stocks that you can use to execute your stock trading systems and the best order type will depend on the trading system you are using and how large your position sizes are compared to the liquidity of the market.
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