Order Types - 1: market, stop, limit, stop-limit, trailing

Hi everyone. Welcome to this video on order types. So today we are going to check five ways to buy and sell shares in the market. Before starting, please have a look at the disclaimer. Okay, so we are ready. So these are the five order types that we are going to check today. We have the market order, the stop order, the limit order, stop, limit and trailing stop. And of course there are other types of orders, but with these five more or less, you can do whatever you want. So let's start with the first one, the market order. So when we are using a market order, we are basically buying at the ask price or selling at the bid price. So let's see with an example. So remember that every time you want to buy or sell, there are these two prices called bid and ask. And suppose we have some stock, let's say stock X. And maybe the bid price is currently $10 20 and the ask price is $10 30. What does it mean? Well, it means that if we want to buy, we have to buy at 10.30 because this is the price at which people are willing to sell. And if we want to sell, then we are going to sell at 10.20 because this is the price at which people are going to buy. And this difference bid ask that in this case is 10 cent is called spread. And usually spread is quite large when market is closed. Okay? And when market is trading then it becomes smaller. Above all for very liquid stock. So with high volume. So again, remember that when you are going to buy or sell at market price, it will always be at the worst of these two. So if you are going to buy, it will be at this ask price that is the highest. And when you are going to sell it will be at the bid price that is the lowest. Now the advantage of the market order is that the execution is guaranteed. So your order will be filled. What you don't know is the filling price, right? Because by the time you insert the order to the time it will be executed, if the market is moving a lot, you don't know how the bid and ask is moving. And also it will always be filled at the worst price, as we have seen. So next one is the stop order. Okay, so stop order is basically a trigger. You specify a level called stop price. And if you are buying, basically what you want is you want to buy if the price is touching or going above your stop price. And when you are selling is the opposite. So you are selling if the price is touching or going below the stop price. So let's see this with an example. Okay, so suppose again we have our stock X, right? And then you want to execute a buy, sorry, stop order at, I don't know, 10:30. I suppose that 10:30 is here, okay? It's this level and currently the price is below. So it's trading here, right? And it's going up. So what is the idea? Basically you want to buy if the price keeps going up. So as soon as the price is touching this level or going above, then you submit a market order. Okay? And here what happens is that the price is touching this level, but the order will be triggered even if the price is not actually touching. So suppose that you have a situation where. The price is going here and then suddenly there is a gap because of some news and the price is very quickly moving here. Then the price will be triggered as well. So no need for the price to touch this level. As soon as it is equal or larger than this order will be triggered. Okay? So a market order will be executed. Okay, so this is the stop order. What about the limit order? Well, a limit order is a way to specify the worst case filling price that you are willing to accept for for your order. And when you are buying, basically the order is executed if the price is smaller than or equal to your limit price. Why? Because basically when you buy, you don't want to pay too much, right? So here you are saying, you know what, I don't want to pay more than this for this stock. And on the other hand, where you are selling, well, if you are selling, basically the order will be executed only if the price is larger than or equal to the limit price. Because you don't want to sell at a price that is too low, right? So let's see with an example. So suppose you want to sell this time you have a sell limit order at 1073. Okay? Suppose that the 1073 is here. And the price is currently below. Okay? So what happens is the price is going up, up, up. When the price is touching this level or going above, then you are going to sell again as for the stop price, even if there is a jump. So from here the price is quickly moving here, for example, order will be filled. It will be executed at this price. Okay? So the idea is that you don't want to sell at a price that is below this, you don't want to sell too low and when you are buying, you don't want to pay too much. Okay? So this is the logic basically of the limit order. What about the stop limit order? So with the stop limit Order we can combine the features of the stop and the limit. And basically the idea is that you want to specify a range, you want your order to be executed, and between the stop and the limit price. That is the main idea. And when you are buying, the stop price is usually below the limit price. And when you are selling, the stop price is above. So let's see again, our stock X. Let's suppose that you want to buy stop limit, okay? And maybe the stop is at 10.05and the limit is 1015. So this is 1505, this is 1050. Okay? So suppose your price is now below 10.05, is going up, down, up, and then suddenly is hitting this point. So this one, remember, is the stop price. So it's a trigger. When the price is hitting this, then the order will be executed. And now the limit is telling us that the order will be executed if the price is $10.15 or less, right? So the price is here, then it's going here, and then it will be executed. So in this case, what happens if, as before, we have the gap? Well, if we have the gap, suppose that we are here, okay? And then suddenly, very quickly, the price is moving here. So if we have this gap, then what happens? The stop price is activated, the trigger is activated because we are above 10.05, but we are not going to buy because we are already above the limit price. We are only going to buy in this situation if the price is coming down and going below the range, sorry, the limit. So if this happens, then we are going to buy. So you see, the main idea here is to have a range and to have our order filled in this range. If the price is not trading in this range, then the order is not filled. Okay? So it's a way to better control the filling price. But it can, like in this case, if the price is not going down, or if the price is never hitting the stop price, then it will never be executed. So let's see now the last type of order, the trailing stop. So the trailing stop order is an order where you specify a gap. And it's like a normal stop order with the difference that your stop level is following the market price by your specified gap. So if you use this trailing stop to buy, then your stop level is going down when the price is going down. And it will not move if the price stays at the same level or is going up. And if you use this to sell, then it's the opposite, right? So the price, the stop price will go up when the price Is going up. And it will not move if the price is staying at the same level or going down. So let's see this last case with an example. Now suppose your again our stock this time stock Y, suppose It's now at 20. Okay, trading at 20. And suppose we want to put a trailing stop order with a gap of $1. So if the gap is $1, it means that our stop will be at $19 at the beginning, right? Now what happens if the price, this is the price and this is the stop. Okay, now price is going up, up, up, up, up. So the trailing stop will follow. Okay, with the same gap. So if now here the price is at 23, the stop will be at your right 22. Now suppose that the price is staying at this level of 23. Well, the stop will do the same. It will stay here. Right? So again we have the same gap. But what happens if the price suddenly start to drop? Well, in this case the stop again will stay at the same level. Okay, and if later the price is going up again, what happens to the stop? So the stop will stay flat until the gap is again one. And when the gap is again one, it will start to move. Okay, and what happens if now the price is going down? As we have seen before, when the price is going down, this one is staying flat. And then at some point when the price is hitting the stop here, the stop will be executed. Okay, so the stop, remember, is a trigger. Here is a stop to sell. So basically the price will be, I don't know, let's say 20 to 30. So when the price is hitting this level, so the 22, 30, then a sell market order will be executed. Right? So the behavior is the same as a stop, but it's not like a static stop, It's a dynamic stop that is following the price. So another important thing is the validity of the order. Because orders can be placed when the market is closed. So when you place a day order, what happens? Well, basically if the order is not triggered by the end of the next trading day, then it will be cancelled. Of course, if you submit a market order, it will be triggered immediately. But as we have seen, stop or stop limit order may not be triggered. So when this stop or stop limit order is a day order, then it will be triggered next day if the condition is verified. Otherwise it will be cancelled automatically. And if you don't want that, if you want to keep the order there, then you have to use the good till cancel order. That is basically valid until you cancel. But actually you should Be careful with that. Because the broker may cancel this good till cancel order if it's not triggered within 30 to 90 days. So you have to check about that. Then there are other ways you can change the validity. Like there is the good deal date order where you can specify the date. But these two are the most common. So to recap, in this video we have seen five ways to buy or sell. We have seen that we can perform our buy or sell action at the current price. But we can also specify some conditions. And the type of order to use really depends on the situation. So for example, your trading system, you may want to enter orders where you want to have a stop loss. So a level at which you want to sell. If the price is going against the direction you expected, you may have some target profit. So you want to use limit order to sell. So it really depends on the system. And in part two, we are actually going to see this when to use these orders that we have seen today and how we can combine these orders according to the system that you are using. Okay, so thank you for watching. That's all for this video and if you like the video, please subscribe to this channel and see you next time.