Understanding Stock Order Types

Stock Order TypesThere are quite a few stock order types and it can take a while to remember the differences between them and even which one to use above and below the current price. First off, lets start with the basics.

First off, a quick tip : The image to the left (Sorry about the poor graphic design skills) is something I learned way back when and it helped me remember what order types were above and below the current market price.

The straight black line to the left signifies the current market price.

Above the market price are SLoBS order types which stands for Sell Limit or Buy Stop.

Below the market price(the straight black line) are BLiSS order types which is Buy Limit or Sell Stop.

Using Proper Order Types

It is important to enter the correct order type so that for example if a stock is trading at $50 and you want to buy it once it moves past resistance at $53. You could enter a Buy Stop order to buy the stock after it moves past $53. If you tried to enter a “Buy Limit” instead you would be instantly filled at the market price.

Lets get into specific order types :

Limit Orders

Limit orders are used when you want to buy a pullback(buy at a price below market) or sell a rally(sell at a price above the market price). You enter in a limit order so that you get filled a certain price. Lets discuss Buy Limit Orders and Sell Limit Orders. (Note- there is no guarantee you will be filled on a limit order if the stock doesn’t stay above/below you limit price long enough to get filled)

Buy Limit Order

A Buy Limit Order is used to buy a specific number of shares at a specific price that is below the current market price. Your buy limit price is entered below the current market price as it is indicating the maximum price you are willing to pay to purchase your shares.

Once a stock’s price trades down to or below the price you have specified, your shares will then be purchased at that price or lower IF the stock’s price continues to trade at or below your specified price long enough for your order to be filled.

For example, you are looking to buy 100 shares of ABC stock if stock pulls back to a certain stock price. If ABC stock is currently trading at $50 per share and you want to buy at a support level of $45, you would place a Buy Limit Order @ $45 on ABC stock.

If ABC price goes down to $45 then your buy limit would be activated and you would be filled at the next best available price as long as ABC stays at $45 or less. If ABC price hits $45 and immediately moves back up then your order might not get filled.

Sell Limit Order

A Sell Limit Order is used to sell a specific number of shares at a specific price that is above the current market price. Your sell limit price is entered above the current market price as it is indicating the minimum price you are willing to sell your shares.

Once the stock moves up past your limit order price, you order is activated and your shares are sold at the next best available price that is at or above your specific limit price.

For example, you own 100 shares of  ABC stock, and it is currently trading at $50 per share. You would like to sell the shares and take your profits if the stock’s price reaches $60 per share.

You place a Sell Limit Order @ $60 on 100 shares of ABC. Once ABC trades at $60, your sell limit order is activated and you will be sold out of your stock provided the stock traded enough above $60 to fill the order at $60 or greater.

Essentially a sell limit order is used to achieve a specified profit target and automate the closing of a position if your profit target is achieved.

Stop Orders

Stop orders are used when you want to buy(buy stop) a breakout or sell at a breakdown(sell stop). You enter in a stop order so that you get triggered at a certain price. Lets discuss Buy Stop Orders and Sell Stop Orders.

Buy Stop Order

A Buy Stop Order is used to buy a stock at a price above the current market price. If the market price trades hits the stop order price you have specified, it becomes a Market Order to buy.

For example, you are interested in buying 100 shares of ABC stock if stock surpasses a key resistance level. If ABC stock is currently trading at $50 per share and you believe that if the price rises to $53 or higher there will be continued upward momentum. You place a Buy Stop Order @ $53 on ABC stock.

If ABC price goes past $53 then your stop order immediately becomes a market order to buy and you would be filled at the next best available price.

Buy stop orders are used to trade upward momentum especially when a stock in in a defined trading range and you want to buy the breakout from that range.

Sell Stop Order

A Sell Stop Order(also known as a stop loss order) is used to sell a stock at a price below the current market price. Once a stock’s price trades at or below the price you have specified, it them becomes a market order.

For example, you own 100 shares of ABC which is currently trading at $50. You are down a little on the position but the max you are willing to risk is 10% on the stock as it has strong support at $45. You decide to enter a sell stop order at a little below $45 so that you are sold out of the stock if it breaks $45. 

If ABC hits your stop order price then your order becomes a market order and will be executed at or below your stop order price if the stock stays at those price levels. 

Sell stop orders are important to keep you disciplined so that you have a defined risk/reward levels established before buying a stock. A sell stop order will protect you against larger losses and more importantly from emotional stress of second guessing yourself when a stock goes against you.

You can also use sell stop to protect gains if you are up on a stock and want to protect your gains when you are up on a stock and don’t want it to drop too far back to your purchase price levels.

Overall Sell Stop Orders work well for preventing big losses and protecting your gains.

Stop Limit Orders

Combining Stop and Limit orders into one order can be useful for fast moving stocks and if you don’t want to buy or sell at prices too far beyond your stop order price levels. Realize that if you stop order is activated but the price doesn’t more far enough to trigger your limit order prices, then you won’t be filled

Buy Stop Limit Order

A  buy stop limit order combines a buy stop order with a limit order. When your buy stop order is activated as the stock price moves up to your buy stop level, you can have it become a limit order rather than a market order so that you don’t buy beyond a certain price.

The limit order essentially determines the maximum you are willing to pay for your stock. This is useful if you have a stock gap up through your buy stop and you don’t want to buy too far past your buy stop level if the stock gets too moves up too far and gets extended.

Sell Stop Limit Order

A  sell stop limit order combines a sell stop order with a limit order. When your sell stop order is activated as the stock price moves down to your sell stop level, you can have it become a limit order rather than a market order so that you don’t sell below a certain price.

The limit order essentially determines the minimum you are willing to get for selling your stock. Sell stop limit order are useful in preventing you from selling at too low a price if the stock gaps down quickly and bounces back.

Summary

Those are the main order types that you would deal with across most securities. There additional variations and “conditions” that you can add to your order depending on what technology that your trading platform or broker offers.

I highly recommend initially papertrading with these order types so you feel comfortable with them, and don’t forget the “SLoBS & “BLiSS” for remembering order types to place above and below the market price.

Please let me know in the comment below if you have any questions or something wasn’t clear.

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