Common Types of Orders: Market, Stop and Limit
by Rick Thachuk

You enter an order to tell your broker what to buy or sell, when to do it, and at what price. There are many types of orders, but beginning traders really need only three: the market order, the limit order, and the stop order. The examples below use these orders for futures transactions, but the identical orders can be used for option and forex transactions. All orders are assumed to be day orders, meaning that they automatically expire at the end of the trading day if not filled or executed, unless you specify that the order is GTC (Good Till Cancelled). A GTC order remains a working order session after session until it is filled or cancelled by you, so be sure to properly record and remember them.

The Market Order:

A market order is the simplest of orders and is used when the greatest priority of the customer is for immediate execution. (An order is executed or filled when the futures contracts have all been bought or sold, depending upon the instructions in the order.) A market order instructs the broker to buy or sell futures contracts immediately at the market price, whatever it may be. The customer does not specify the price in a market order. Market orders are the easiest way to enter or exit a market since the customer receives immediate execution – and must pay or receive whatever price is necessary for immediate execution. For example, a customer who wants to sell 5 March cotton futures immediately would enter an order to sell 5 March cotton at the market. The customer does not know the selling price of their cotton futures until after the order has been executed.

The Limit Order:

With a limit order, price takes the highest priority. For limit buy orders, the customer includes, along with the type and quantity of futures contracts to purchase, a maximum price to pay for the contracts. A customer will use a limit buy order if they desire to buy the futures contract, but want to pay no more than a specified price – the limit price. This price is always below the market price since the customer wishes to buy at a cheaper price. For example, assume December gold is trading at $695.75 per ounce. A customer who enters a limit order to buy 5 December contracts at $392.00 is willing to buy gold futures only if they can be acquired for $692.00 per ounce. This limit order to buy will only be executed if the market price declines to the limit price.

For limit sell orders, the customer specifies a minimum price to sell the contracts. A customer will use a limit sell order if they desire to sell the futures contract, but want to receive at least some specified price – the limit price. This price is always above the prevailing market price. For example, assume December gold is trading at $695.75 per ounce. A customer who enters a limit order to sell 5 December contracts at $698.00 is willing to sell gold futures only at a price of $698.00 per ounce or higher. A limit order to sell is only executed if the market price rises to the limit price.

The Stop Order:

A stop order, like a limit order, is only executed once a specific price is reached, but the motivation for the transaction is different. Whereas the limit order is typically used to enter into a futures position at a specific price, a stop order is mostly used to exit or close a futures position at a specific price. Stop orders can be used to close a position in the event that prices move adversely and the position loses money, and are hence regarded as a useful risk management tool. A stop order to buy has a price that is above the market price and would be used by a customer who has established a short futures position. If prices rise so that loss accrues on the customer’s short position, then the stop order provides a limit to the loss – as soon as prices rise to the stop price, the order is executed as a market order. For instance, with September Canadian dollar futures at $.9225, a customer who sells 3 futures might enter a stop order to buy 3 September Canadian dollar futures at $.9260. If prices rise to the stop price so that the customer is losing money, the stop order will be executed and futures contracts will be purchased. By so doing, the original short position is offset or closed out, thereby preventing any more loss.

Similarly, a stop order to sell has a price that is below the market price and would be used by a customer who has previously established a long futures position. If prices fall so that loss accrues on the customer’s long position, then the stop order provides a limit to the loss – as soon as the market price falls to the stop price, the order is executed, thereby closing the initial long position. For instance, with September Canadian dollar futures at $.9225, a customer who buys 2 futures might enter a stop order to sell 2 September Canadian dollar futures at $.9185. If prices fall to the stop price so that the customer is losing money, the stop order will be executed and futures contracts will be sold. By so doing, the original long position is offset or closed out, thereby preventing any more loss.

Stop orders do not guarantee that the loss on a futures position will be confined to the stop price. Prices may continue to move adversely as the stop order is being executed resulting in larger loss than anticipated. This is referred to as slippage and should be taken into account when using stop orders as a risk management tool.

In the examples above, stop orders were used to protect a position previously established. Stop orders can also be used to initiate a new position. If prices are trading in a range and you wish to buy if prices rise to a certain point (that is, break out of the range on the upside), then you would use a stop order to buy. Recall that a stop order to buy has a price that is above the market price. Similarly, if you wish to sell on a break-out to the downside, you would place a stop order to sell.

It may be helpful to remember this distinguishing feature between limit orders and stop orders: A limit order to buy has a price that is below the market price while a stop order to buy has a price that is above the market price, and a limit order to sell has a price that is above the market price while a stop order to sell has a price that is below the market price.

Other Types of Orders:

The Market on Close (MOC) order is a market order which can only be filled within the closing range. (The closing range is officially determined by the respective commodity exchange.) Similarly, the Market on Open (MOO) order is a market order which can only be filled within the opening range. These orders are used by professional traders who believe that the opening and closing range of a market are more liquid and provide a more accurate indicator of value than intraday prices.