How Different Order Types Work

Hey everyone! 👋

Today we wanted to take a look at the 3 main order types that exist when it comes to interacting with the markets, and explain a bit more about what they do, and when they are useful.

Sound good? Let’s jump in! 🚀



Before we talk about the different order types that you might see when you place a trade through TradingView’s platform, it’s important to understand how almost all markets work in the first place.



When it comes to any market, at any time, there is a “BEST BID”, and a “BEST ASK”. 🔢

The BEST BID is the highest price that someone is willing to pay for a given asset, and the BEST ASK is the lowest price that someone is willing to sell a given asset for.

Let’s think about that again. When it comes to stocks, for example, your broker will present you with a consolidated marketplace of orders (orderbook) for a given stock. Let’s say you’re in the market for some Apple shares. You can see that the stock is “trading at” $175.50. What does that mean?

It means that the lowest price that someone is willing to sell their Apple shares might be around $175.52, and the highest price that someone is willing to pay for Apple shares might be around $175.49. 💹



How are these market participants making their intentions known? By placing LIMIT ORDERS. ⌛

1.) A LIMIT ORDER is a type of order that you send to the trading venue when you’d like to buy or sell something at a certain price.

In the Apple example above, let’s say that you’d like to buy some Apple, but you don’t want to pay a penny more than $175.25. When you enter this order and click “send”, your order goes to the venue, and JOINS the orderbook, at the price of $175.25. You are now “LIVE” and in the market. Your broker will deduct the cash it would require to fulfill that order from your buying power while your order is live.

Next question: If people have their limit orders out in the order book, how would price ever work its way down to you? 🔽



There are a couple ways, but one of them is most common: MARKET ORDERS ⌚

2.) A MARKET ORDER is an order that is sent to the market and immediately takes action to buy or sell an asset at whatever the prevailing prices are.

Lots of people use market orders because they virtually guarantee that you will get the resulting position you want, instantly. The downside is that once you send a market order, you can’t control the price you get. Prices may change in an instant, and you may end up with a position at a price that you no longer want.

Back to our example: if you’re waiting to get filled with your order in AAPL, buying shares at $175.25, then whoever pays you will be crossing the spread, probably with a market order. 💵



Let’s assume that you get filled by buying shares in AAPL at $175.25, and you’d like to get out of your position if the stock trades under $175. In this case, you’d use a STOP ORDER. 🛑

3.) STOP ORDERS are orders that you send to the market that live on Nasdaq/NYSE servers. They have a trigger price, and once the trigger price is hit, they execute a Limit Order or a Market Order based on your inputs. These are STOP LIMIT ORDERS, and STOP MARKET ORDERS.

This sounds complicated, but it’s more simple than it sounds.

Again; back to our example. Let’s say that you get filled on your buy in AAPL at 175.25, but then your stop order gets hit at 174.99 (you wanted to get out if the stock went under 175).

If the stop order is a market order, you will get hit out of your position, no matter the price. Simple as that! ✅



Next week, we will be covering some of the order techniques that professional traders use to get better prices. 🦾

Stay safe out there!

-Team TradingView 👀