Before anyone enters the market, there are certain technicalities associated with the market that is necessary for smooth riding. Knowing the types of orders is an essential step in this direction. It helps you to select the appropriate type of order to suit your execution strategy in the market.
Broadly, there are five types of orders available to an investor for the execution of his trades in the market:
- Market Order- This type of order buys or sells a security immediately at the market price. This type of order guarantees execution but does not guarantee the execution price. Generally, the order is executed at the nearest ask or bid price. The order is suitable for investors for whom the execution price is irrelevant in the short term.
- Limit Order: A limit order is an order to buy/sell the securities at a price specified by the investor. In a buy limit order, the order will be executed at a price specified by the investor or lower. Similarly, in a sell limit order, the order will be completed at a limit price or higher. Limit orders guarantee the execution price for the order but do not ensure execution as the price may/may not touch the point required by the investor. It works best for traders who have pre-specific entry and exit points.
- Stop Order- A stop order is an order to buy or sell a stock once the price of the stock reaches a specified price known as the stop price. Generally, stop orders are used to protect profit or avert the possibility of a substantial loss while trading. To protect profits when the investor has a short position, a buy stop order is used above the current price. Similarly, a sell stop order is used below the current market price to protect a profit on the stock they own.
- Bracket Order- Bracket order is the newest addition to the types of orders available to the retail customer. In a bracket order, the customer can set the stop loss and target at the same time when he is placing the order for the transaction. Due to effective risk control in a bracket order, the leverage can be increased for the investor. For ex-The standard intraday leverage for 3x on a Nifty contract can be increased to 6x for the person using the bracket order.
- GTD order- GTD, also known as Goods Till Date, is a type of order that can be used by the investor to make an order that is active until the specified date unless it has been fulfilled or canceled. This type of order is placed when the customer is not sure of whether the price he is seeking will be available on the same day. Hence he uses the GTD order up to a specified date to make sure that the order is valid until the specified date. For Ex- An investor wants to buy Reliance at 1750, but the price is unlikely to reach that during the same day. So he places a GTD order and specifies the date, maybe one week from the present. Now the order will be valid until the specified date. If the stock reaches 1750 any time before the date specified, the order will b executed.
Tips for using Limit, Stop, and Bracket Orders:
Limit and Stop orders are useful instruments for a trader for consistent profits and capital protection. I recommend limit orders for intraday traders who trade based on a strategy or formula. Since the difference of a few points matters in intraday trading, a trader must ensure that he strictly trades on the price specified by the limit order.
Stop-Loss (SL) orders are essential for every trader to protect capital and profits. It is to be noted that stop orders must be followed with a specific discipline. There are various ways to incorporate these orders in your trading:
- Stop-loss as a percentage of equity- A trader can put SL as a certain percentage of his account balance. In this way, he can be sure of not having mega-losses in his account, thereby wiping away his position in the market. I recommend a daily loss limit of 0.5 to 1%. For ex- If you have Rs.20000 in your account, make sure you have an SL at no more than Rs.200.
- Technical protective stops- In technical protective stops, support and resistance on technical charts are used as a way to put stop orders. In a long trade, one would place a stop order a few points below support, and for a short trade, a few points above resistance.
- Percentage of Price Stops- Stops are placed as a percentage of the price at which the position takes place. This ensures that only a certain amount is lost in a position. It can also be used to protect profits in a situation when the position is in a profit for a considerable period of time, and there is a sudden movement against the trader. Also, a trader can place targets. For ex- A stock bought at Rs.20 and a target of 10% means the position will be squared off at Rs.22.
Now, when we talk about bracket orders, they must be placed when a specific target and SL are known to the trader. The trader can incorporate the above price stops in a single order, i.e., the bracket order. There are several advantages of placing a bracket order. The most prominent is the increase in leverage available to a trader. The leverage is almost doubled due to a predetermined loss and the safety it provides to a creditor. As leverage is increased, a trader with limited funds is also able to trade in the futures markets. This provides a greater scope of returns.
This concludes the discussion on types of orders in the market. In the later sections, we will discuss more about margins, VaR, and how a trader can use them to increase returns.