There are a lot of ways to buy and sell stocks these days, and virtually any kind of order you can think of is now available to traders. Because of my trading strategy [1], I’m often asked by subscribers of my swing trading service [2] which order types I use to execute trades. The debate between Market & Limit Orders is an old one, but I’ve got pretty clear reasons for which type I prefer and when I use them. Let’s do a little Order Type 101 and look at some of the basics. Then I’ll wrap things up with a look at my personal preference.
Market Order
A market order is a command to your broker to buy the shares you want at the next available price, whatever that may be. Market orders are the fastest ways to get filled, but they carry no price specifications.
Limit Orders
When you place a limit order, you’re telling your broker to execute your order at a specific price or better. If your price limit cannot be met, your order goes unfilled.
Stop Orders
A stop order is set at a specific price but once that price is met, the order becomes a market order. So a Buy Stop Order would be when you tell your broker that after XYZ crosses $50.00, send out a Market Buy for your shares.
Stop Limit Orders
A stop limit order waits for your specified price to be hit before a Limit Order is placed. This is similar to a Stop Order but instead of the order going out as a Market Order it goes out as a Limit Order. An example would be if you want to buy XYZ after it trades above $50.00, but want to Limit your purchase price to $50.25 or better after XYZ clears the $50.00 level.
Advanced Order Types
In addition to the basic orders above, there are a number of advanced order types which include: Day (order is cancelled if not filled today), One Cancels Other (setting two orders where the second is cancelled upon the execution of the first), Immediate or Cancel (a limit order immediately followed by a cancel), and numerous others.
Many trading firms (including mine [3]) offer “Conditional Orders [4]” where you can specify many variables which you want to be present before your order is filled. Whether it’s price, time, volume, P&L, net change, bid increase, or virtually any other condition that you want to see before your order gets filled, you can set them up. (I use these daily as I’ve mentioned before).
When I’m asked which order types I prefer, I do have a simple answer. Whether you’re placing orders through your browser or using a direct-access trading platform, your best bet is usually going with the Market Order. I use a ton of Market Orders for two main reasons. First, when I get a signal, the thing I want most is to be IN that trade (or OUT of it in the case of an exit signal). The last thing I want is to mess around and get greedy or cute to try to save a couple of pennies and risk missing out on a far bigger move. That would be the epitome of “tripping over pennies on your way to dollars.” Second, with spreads as narrow as they are these days and stocks trading in penny increments, slippage is far less of a concern. Back in the good ol’ days when stocks traded in fractions, it was one thing to not want to pay up by 1/8 or ¼, but now days “chasing” a stock and eating the spread usually just means a few pennies. My feeling is that “paying up” will hardly mean the difference between me being a profitable trader or not. I know what the hard part of trading [5] is, so I’m not afraid of paying a few pennies more in order to catch a nice move. Because I’m primarily a swing trader [6], I’m looking for multi-point moves, so 3 or 4 cents is an afterthought.
I will use limit orders when I’m offering out shares above the market to take profits [7] in a winning trade (or bid out of winning short sale positions), but that’s about the extent of when I use them. In theory, Limit Orders are a nice concept but I know that for the few cents they might save me on occasion, they will more often mean many dollars in opportunity cost in those stocks that break out quickly and never look back (I’ve found the best trades behave that way). Trying to buy a breakout with a Limit Order as the stock moves away from you will result in being left behind most of the time, and that’s far more frustrating to me than paying a few more pennies and catching the trade.
So when it’s time to get into a stock on the move, or when my stop loss level has been reached, the Market Order does the job for me every time.
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Jeff White
President, The Stock Bandit, Inc.
www.TheStockBandit.com [9]
[tags]Stocks, Investing, Stock Trading, Trading, Order Types, Market Order, Limit Order, Stop Loss Order[/tags]
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