Day trading is a rewardable profession that can be quite profitable but only if you do your homework. Learning the basics of trading before you risk real money in the market is a must. One of the first things you will need to learn about is the different types of orders and what sets them apart. Today, we will start by learning the differences between a stop order and limit order.
Breaking Down Stop Orders
A stop order is also commonly known as a stop-loss order. When you place a stop order, you are telling the broker that you want to execute the order when the price reaches beyond a point that you the investor is not willing to take losses on. For example, buy orders will execute when the price reaches beyond the stop limit price. For sell orders, you will be selling securities when the price drops below the stop price.
This allows you to limit your losses and get rid of a stock before it falls too far beyond what you are willing to lose. Investors love to use stop orders to primarily limit loss. This is a great way to trade with discipline, and stopping a total loss is always a wise move.
Doing so will allow you to recover and as you probably already know, there is always another day to trade. The disadvantages of a stop order are trade price can be worse than the stop price. Also, it can be triggered by short term fluctuations which are bad for your overall profit margins.
Breaking Down Limit Orders
When it comes to limit orders, you are trying to take advantage of a certain price that you target by placing the order. A limit order is placed and instructs the broker to execute when a certain price is met or better. For sell orders, the broker will execute the order when the stock price has reached a certain price or higher.
A buy order, on the other hand, will allow you to execute the order when the price has reached a certain price or lower. This will allow you to get in on a trade when the price is low and later you can sell it for a profit. Limit orders are a great way to trade without having to always be stuck in front of your computer screen. These orders are preferred by many day traders because it allows them to lock in a price that is guaranteed to execute at the price they want or better.
But you have to keep in mind that limit orders are not always executed and can expire if the price is not met. One disadvantage of limit orders is that they will often come with higher broker fees and as you learned above, they don’t always execute.
Now that you’ve learned the difference between a stop order and a limit order, you are better equipped to trade. While there are several different types of orders, these two are some of the most common used.