Understanding the Concept of Order-Triggers-Two

Summary:

Order-triggers-two combines the best of market and limit orders. It helps you set a trigger price, which, when reached, enables you to buy a stock, thus mitigating risk. 

In stock markets, investors use various types of orders to buy or sell security. Each type of order has its own set of functioning, advantages, and disadvantages. Order-triggers-two (OTT) is one of the widely used market orders. So what is OTT, its functioning, and its benefits? Let’s find out.

What is order-triggers-two?

OTT is a type of market order combining the element of market order and limit order. Suppose you want to buy stocks of a certain company but don’t want to pay more than a certain price. OTT helps you set a trigger price, which when reached, activates the order into a market order. Let’s understand it with an example.

Suppose you are interested in buying shares of a company currently trading at INR 150 per share. However, you feel that if the price drops to INR 140, it presents a good buying opportunity. You don’t want to sit in front of your monitor, waiting all day for this price to be reached. This is where you take the help of an OTT.

You set a trigger price of INR 140. You can also set additional conditions, such as activating the order only during regular trading hours, not pre-market or after-hours trading. You also specify the number of shares you want to buy, say 100. Suppose the market opens the next day, and due to price fluctuation, the stock price drops to INR 140. As soon as this happens, your order gets automatically converted into a market order.

Advantages of OTT

OTT is a versatile tool that offers you several advantages. Some of its major benefits are as follows:

• Helps in risk management

OTT helps in effective risk management. By setting a trigger price, you can control your trade's entry and exit points. This ensures that transactions happen within a predefined price range, thus bringing down your chances of suffering unexpected losses.

• High flexibility

OTT offers a high degree of flexibility. It allows you to adapt to changing market conditions by automating the transition from a limit order to a market order when the trigger condition is met. This adaptability is of great value in stock markets, where prices can change rapidly.

• Comes in handy during market volatility

OTT converts the order into a market order when the trigger condition is met. This is useful when quick execution is required, especially during market volatility. 

• Helps mitigate slippage

Slippage happens when the execution price is different from the expected price. With OTT, you can mitigate slippage by converting your order into a market order only when it meets the trigger price. This helps minimise the impact of price variation in trades.

• Capitalise on market opportunities

You can use OTT to capture specific market opportunities. For instance, if you feel that a stock is good to buy only when there’s a dip in price, you can set the trigger price accordingly. This allows you to capitalise on market opportunities without the need for constant market monitoring. 

• Convenience for busy investors

OTT is highly beneficial for investors with busy schedules who may not have the time to monitor markets consistently. The order can be executed automatically without active monitoring with the trigger conditions set. 

Drawbacks of order-triggers-two

Just as any market order has drawbacks, OTT also has a few disadvantages. These include:

• Non-execution during market gaps

During periods of market gaps, when prices jump significantly without trading at the trigger level, the OTT order may not get executed at all. This could lead to missed opportunities.

• May not suit all traders

OTT may only suit some traders. If you would like to take trading calls based on present market movements and prefer to watch markets constantly, you may need a different strategy.

To sum up

As evident, OTT combines the best of the market and limit orders. It offers a flexible and controlled way to navigate stock markets if used with prudence. It also helps bring discipline in trading, which is highly essential for wealth creation.