Trading Order Types

The basic inputs for an order are:

a)      Whether to buy or sell

b)      Whether to execute at the current market price, higher price or lower price

Diagram Representation of Order Types

Both buy and sell orders have their own ways of price execution depending on the order type selected, as shown above. So let us first study the basic order types.

Limit Order

This is an order type in which case, regardless of whether it is a buy or sell, the order is kept in the order book at a particular price until the price is triggered. This kind of order type is used when the trader wants to ensure that his buy order his not executed at a price higher than his trigger price, and that his sell order is not executed at a price lower than his trigger price.

Market Order

In this type of order there is no specific price mentioned; instead, it is guaranteed to get executed at the best available price. “Market” here means the best bid price quoted for a sell order and best ask price quoted for a buy order. This kind of order type is used when the trader wants a guarantee to buy or sell a stock at the best prevailing price in the market but does not want to specify a specific price.

Stop-Loss Order

As the name suggests, the order is mainly used to prevent the loss of a particular position already present or open in the market. But these orders can also be used to create a fresh position if the stock triggers a price. The two major terms used in a stop loss order are:

Trigger Price: The price at which the order execution is to be initiated.

Limit Price: The price, up to which the order is can be executed; otherwise the order remains open.

There are two types of stop loss orders.

Stop Loss Limit Order

In this kind of stop loss order both the trigger and the limit price are to be given. In case of a buy stop loss limit order the Trigger Price < Limit Price and in case of a sell stop loss limit order the Trigger Price > Limit Price.

Stop Loss Market Order

In this kind of Stop loss order, only the trigger price is to be mentioned. Once the trigger price is hit, the order becomes a market order and is sent to the exchange.

We have seen the basic order types widely used in the market. Since markets can be very volatile, special order types are also available for highly volatile scenarios.

Cover Order

This is a special order type which has a market order and a stop loss market order attached to it. In this type of special order, the first leg is always a market order; once executed, the second leg (the stop loss market order) is placed. The stop loss order cannot be cancelled. Both orders are interconnected. The order can be modified up to the Last Traded Price (LTP) in the case of a favorable market movement.

Cover Order Screen Shots on the NEST Trader Platform

Bracket Order

This is a special order type that has three different legs:

1^st Leg          : Limit Order / Market Order

2^nd Leg         : Stop loss Limit Order / Stop loss Market Order.

3^rd Leg          : Limit Order / Market Order.

In a Bracket Order, the first leg is an independent order, whereas the second and third legs are both dependent on the first leg and are also interconnected. This means that only after the first leg has been executed can the second and third legs be considered in the market.

Since the second and third legs are interconnected, if one cancels either of the two legs, the other also gets cancelled; this is also commonly referred to as One Cancels the Other (OCO). Therefore it can be said that a Bracket Order can be used to book profits or lock in losses (due to stop loss order), which ever executes first, through one single order. Thus it will save a lot of time for a trader by putting all three orders in a single order.

Due the inter connectivity between the second and the thirds legs, the OCO feature ensures that no extra positions get built.

Bracket Order Screen Shots on the NEST Trader Platform

So there you have it: all the major order types, their disadvantages/advantages, and how to utilize them efficiently.