There are several order types investors can use to set buy (and sell) orders with a broker in any given market. The most commonly used are buy/sell at market, stop-entry or buy/sell-on-stop orders and buy/sell on limit orders.
At Market Order:
A buy/sell at market order is just that, the order gets filled at the current market price, give or take spread and potential slippage.
Stop orders (not to be confused with stop-loss) are simply setting a buy order at a price above (or below when selling short) the current market price. When price rises (or drops for short) to the stop-order price the trade is triggered and becomes active.
Limit orders are usually set to buy at a price below the current market price (or above if shorting). If price drops to the limit price (rises when selling) the order is triggered.
A Stop-Loss order is a safety mechanism designed to limit an investor’s loss if a position goes against them. A stop-loss can protect both long and short positions.
Essentially if an investor holds a long position, a stop-loss order is set to be triggered to sell the issue if price drops below the protective stop value, cancelling out the long position. Conversely, an investor holding a short position can set a stop-loss order to buy if price raises through the stop-loss value, thus limiting the amount lost should the position goes against the investor.
It is important to understand that there are two types of risk involved when holding a position. Firstly there is the monetary amount lost from your account should the market turn and go against you. Secondly, there is the likelihood your stop will get hit.
Stops that are set very close to the current market price may reduce the amount risked by the investor but greatly increase the chances of being executed before the market has a chance to make its move to the profit target.
It is much more productive to set stop-loss order at a realistic price, that is to say, at a price where you do not expect price to go unless your initial assessment of the market was incorrect, in which case you want to be out of the trade.
Remember stop-loss orders can be moved in the direction of the market as the move gets under way.
Stop-loss orders are a necessary evil for any investor serious about trading the stock market. When used correctly they can prevent serious damage to your capital, because if you are going to be wrong, it’s better to be a little bit wrong and live to trade another day!
Setting a take profit target within an order simply sets a limit order to cancel a trade once a predetermined price is met.
Spread is the difference between a brokers Bid and Ask price for a particular issue. This can increase or decrease during any particular trading session depending on the liquidity of the market. Spread usually increases significantly during very liquid trading periods such as the opening of a trading session and tends to decrease as liquidity trails off during that session.
It is important to note that spread must be accounted for when setting orders and stop-losses. A buy-on-stop order will be executed when price reaches the lower ask price and sell orders are triggered when price reaches the higher, bid price.
HOW TO SET A TRADE ORDER WITH AN ELECTRONIC PLATFORM
Each and every market-maker/ broker or trading platform is different, it is in your best interest to become familiar with this platform especially the entry platform and the ability to be able to utilise the long and shorting function and adjusting/closing out positions. At MCC we place our orders both long and short.
Each platform is similar in that it uses the same terms and has to have the ability to input the same information even though appearances may differ. Each platform will allow you to input an entry price, a stop loss price and a take profit price both long and short. Once these three are entered you will be allowed to adjust your risk amount by adjusting the number of contracts / units to increase or decrease your stop loss amount (which is your dollar amount risk, we use a 10% risk of your overall capital in our market maker platform. Your risk tolerance is something you will have to work out yourself.
We find that market-maker platforms are generally very professional and will talk you through any issues that you have with setting you orders. We utilise CMC Markets and have found them to be very professional and prompt with their assistance. (Please do not consider this any sort of endorsement or advertisement for CMC Markets).
MARKET MAKER PLATFORMS / BROKERS.
As discussed above we use CMC Markets as our market-maker platform, each and every market- maker platform use slightly different and variable price movement information, their position on each market will be slightly different which will affect your interpretation of our signals. We cannot endorse CMC markets in any way and do not suggest you utilise their platform unless you choose to do so. We have found that their market price compared to other pricing is slightly different, but having said that price values on all market-maker platforms differ slightly to the actual market price, no matter which platform you use. We have found that they do not try to hit your stops by fudging their figures as such and are very professional.
We utilise the price movement information from an independent source and have tailored the information to be able to be used in CMC Markets price movement market maker platform and this allows maximum efficiency of our information.
We cannot and do not take into account the differences in price values between each market maker / broker platform, this difference will depend on which one you use and it is down to the individual to make appropriate allowances for that difference.