How to Use Market, Limit & Trailing Stop Orders in Trading

Understanding the differences in stock market order types is important for effective trading.

When you’re ready to buy or sell stocks, you can optimize your bid and ask prices to improve your profits. The prices you get in the market can be especially important on larger stock purchases.

Limit, market, and stop-limit orders help ensure you get the best possible stock purchase price. Stop-limit, stop-market, and trailing-stop orders also help you sell your stocks for a profit or limit your risk.

Buy Orders Quick Reference

*Execution is generally expected but not absolute (e.g., halts, limit-down, severe gaps, or illiquid markets).

• Market Order: This allows an investor to buy or sell a stock at the current market price. It’s quick and guarantees execution, but not the price.
• Limit Order: An investor can buy or sell stock at a specific price or better. It gives the investor control over the price but doesn’t guarantee execution.
• Stop-Limit Order: This is a combination of a stop and a limit order. It becomes a limit order once a certain price level (stop price) is reached. It gives the investor more control, but the trade may not be executed if the stock does not reach the specified limit price.

Each order type has its benefits and risks, so it’s essential to choose the one that best suits your trading strategy.

Sell Orders Quick Reference

* Execution is generally expected but not absolute (e.g., halts, limit-down, severe gaps, or illiquid markets).
** Trailing stop behavior depends on whether it’s configured as stop-market (execution prioritized) or stop-limit (price control prioritized).

• Stop Loss: This is the process of selling stock when it reaches a certain price, used to limit an investor’s loss on a security position.
• Sell Market Order: This order sells stock at the current market price. It guarantees execution but not the selling price.
• Limit Order Sell: Sells stock at a specific price or better. It allows for price control but doesn’t guarantee the sale will occur.
• Stop Market Order: A stop order that becomes a market order once a certain price level (stop price) is reached. It guarantees execution but not the price.
• Stop-Limit Order: This order becomes active as a limit order once a specified price level (the stop price) is reached. It provides more control over price but doesn’t guarantee execution.
• Trailing Stops: For a long position, the trailing stop price is set at a percentage level below the market price. The price is adjusted as the price fluctuates.
• Bracket Order: Enter a new position along with a target/exit and a stop-loss order. Once the main order is executed, the system will place two more orders (profit-taking and stop-loss).

Opening a stock trade – Buy

When you open a stock trade, you buy or sell the stock at the current market price. You can use three types of orders: market, limit, and stop-limit.
You buy or sell the stock with a market order at the current market price. This is the simplest type of order used when you want to buy or sell the stock as quickly as possible.

With a limit order, you specify the maximum or minimum price you are willing to pay or receive for the stock. A limit order will only execute if the stock is traded at your price or at a better price. This type of order is useful when you want to buy or sell a stock but don’t want to pay the current market price.

With a stop-limit order, you set a stop price and a limit price. The stop price is the maximum price you are willing to pay for the stock, and the limit price is the minimum price you are willing to sell it for. If the stock reaches your stop price, your order becomes a limit order and will only execute if the stock is traded at your limit price or at a better price. This type of order is useful when you want to protect yourself against a sudden drop in stock price.

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Market Order

A market order is the most basic type of order. When you place a market order, you instruct your broker to buy or sell shares at the current market price. Market orders are typically filled very quickly; however, there is no guarantee that you will receive the exact price you hoped for.

Opening a market order on a stock means you wish to buy that stock at the current market “Ask” price. This is the quickest executing type of order, as it means you will accept the Ask price closest to the current market price. The price you receive may differ from the displayed price on the exchange when you place the order due to factors related to volatility and liquidity.

Limit Order

A limit order is an instruction to buy or sell shares at a specific price. Limit orders give you more control over the price you pay (or receive) for a stock, but they may not be filled immediately if the stock’s market price does not reach your specified limit.

A limit order indicates the highest price you are willing to pay or the lowest price you are willing to accept to sell a security. This helps protect you from sudden price swings that you may experience when executing a market order. Still, it may also take longer to execute as the trade will only be executed when the market order conditions are hit.

Limit Order Example

Joe wants to buy Apple Inc. for $600 per share. The current price is $601. He places a limit order for 100 shares of Apple for $600. If Apple’s price drops sharply to $595, his trade may execute at $595. However, if the stock price never moves down and continues to rise to $610, his order will never be executed.

Stop Limit Order

A stop-limit order is similar to a limit order, but with an additional “stop” instruction. A stop-limit order becomes a limit order when the stock’s market price reaches your specified “stop” price. This type of order can protect against downside risk by ensuring you do not pay more than you are comfortable with for a stock.

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Closing a stock trade – Sell

When you’re ready to sell your stock, you can choose from several types of orders. A market order will sell your shares at the best available price, while a limit order will only sell them at a certain price or better. If you want to set a stop-loss order, that will automatically trigger an order to sell once the stock reaches a certain price. Several types of trailing stops allow you to protect your profits as the stock price rises or falls. When you’re ready to close out your position, read through all these options to make the best decision for yourself!

Stop Loss

A stop loss is an instruction to sell shares if they fall below a certain price. Stop losses can help you limit losses on a losing trade, but they can also cause you to miss out on potential profits if the stock’s price recovers quickly.

The simplest way to sell your stock is to place a market order. This is the quickest-executed type of trade. Of course, if the stock price moves very quickly between the time you click the sell button and when the trade is executed, you may not receive what you expect when selling the stock.

Sell Market Order

A sell market order is an instruction to sell shares at the current market price. Like buy market orders, sell market orders are typically filled very quickly, but there is no guarantee that you will get the exact price you hoped for.

Limit Order Sell

A limit order sell is an instruction to sell shares at a specific price. Limit orders give you more control over the price you pay (or receive) for a stock, but they may not be filled immediately if the stock’s market price does not reach your specified limit.

Limit Order Sell Example

In this example, Joe wants to sell Apple Inc. shares at $610 each; he places a sell limit order. The stock price moves from $601 to $611, and his sell limit order will execute at or above $610.

However, if the stock only moves down from $601 to $590, his sell order will never execute.

Stop Market Order

A stop market order is similar to a limit order but requires an additional “stop” instruction. A stop market order becomes a market order when the stock’s market price reaches your specified “stop” price. This type of order can protect against downside risk by ensuring you do not pay more than you are comfortable with for a stock.

A stop market order is similar to the previous example, except that when the order price is hit, it executes at the current market price. Essentially, it means you wish for your stop order to be converted into a market order once the target price is reached.

Example: Place a stop market order to sell.

Bobby places a stop market order for Exxon Mobil at $85. The stock price hits $85, and the trade is activated. The market is volatile, and the stock instantly moves to $84.50 before the trade is executed because the order has been converted to a market order upon activation. Bobby gets only $84.50 per stock.

Stop Limit Order

A stop-limit order is similar to a limit order but with an additional “stop” instruction. A stop-limit order becomes a limit order when the stock’s market price reaches your specified “stop” price. This type of order can protect against downside risk by ensuring you do not pay more than you are comfortable with for a stock.

Using a stop-limit order means you want your order to be executed at a specific price and guarantee that when that activation price is met, the execution of the order is also at or better than the target price.

Example: A Stop limit order to sell.

Susie wants to sell IBM at $200 per share; the current stock price is $199. She opens a limit order with an activation price of $200 and a limit price for the order at $200. IBM’s stock price briefly rises to $200 but quickly returns to $199.90. The trade is now activated but not executed. Thirty minutes later, the stock price returns to $200.50. The activated trade is now executed, and the sale is made.

This type of order provides maximum security, ensuring you receive the price you wish for your sale.

Trailing Stops

Trailing stops are instructions to sell shares if they fall below a certain price. They will automatically adjust downward as the stock’s price rises. This order can help you lock in profits on a winning trade while giving you some upside potential.

A trailing stop is a distinct market order, best illustrated with an example.

Example: Trailing Stop Sell

Bernard owns a $10 stock and places a 10% trailing stop. The stop is initially set at $9, 10% under the stock price.

• Days 1 through 4, the stock’s value increases.
• The trailing stop remains 10% behind the stock price.
• On day five, the stock price falls, but the trailing stop remains unchanged. It remains at 10% behind the previous high since its initiation.
• On day 6, the stock continued higher.
• Days 8 through 10, the stock starts to decline, but the trailing stop remains unchanged.
• On day ten, the stock price falls through the value of the trailing stop, and the sell order is executed.

The trailing stop can be a very flexible and useful way to manage your risk while you are away and trying to gain extra profit.

Bracket Order

A bracket order is a stop order that includes instructions for buying and selling. With a bracket order, you can specify a target price at which you would like to take profits and a stop price at which you would like to cut your losses. This type of order can help you manage your risk and protect your profits on a trade.

A bracket or conditional order allows a trader to place multiple leg orders with a broker.

This means you can combine previous market orders into a rule that executes the logic.

For example, Billy Jean wants to buy Suntech Corp at $5 and ensure that if it falls to $4.50, she sells it. She also thinks a 20% gain on the stock is a good profit and would like to sell it at that price ($6) automatically.

The stock price is currently at $4.80.

Billy Jean is going on holiday, so she decides to open a bracket order to handle her trading.

In one trade entry, she opens three orders.

1. A market order at $5
2. A conditional stop market order at $4.50
3. A conditional stop-limit order at $6

This means that Billy Jean’s stock will be purchased at market price when it reaches $5 (1).

If the stock goes to $4.50, it will be sold at the market price (2), and (3) will be canceled.

If the stock goes to $6, the stock is sold at or above $6 (3), and (2) will be canceled.

Bracket orders are a very flexible way to establish rules upfront and ensure you stick to them.

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