Order types: market, limit, stop, OCO and trailing stop

Knowing which way to trade is not enough. You also need to know how to get in and out of the market. The same idea can be executed in several ways, and the order type you pick changes your entry price, your chance of being filled and the way your loss is capped.

In this lesson, we use EUR/USD throughout, with a current price of 1.0850. You will see the orders every serious platform offers, and the situations where each one makes sense.

Market order: right now, at the available price

A market order is the simplest: you click "Buy" or "Sell" and your position opens immediately at the best available price. When you buy, you pay the ask; when you sell, you get the bid. You are sure to be filled, but not of the exact price.

In a quiet, liquid market, the difference is often zero. During an economic release or a session open, though, the real price can drift from the one shown when you clicked. This is called slippage, which you will look at in detail a little later in this level.

Pending orders: limit and stop

A pending order is an instruction you leave with your broker: "open my position only if price reaches this level". There are two families, and the difference between them is the number one source of confusion for beginners.

• Buy limit: placed below the current price. You want to buy cheaper, on a pullback. Example: EUR/USD is at 1.0850 and you place a buy limit at 1.0820 on support.
• Sell limit: placed above the current price. You want to sell higher, on a bounce into resistance, for example at 1.0890.
• Buy stop: placed above the current price. You only want to buy if the market confirms its rise by breaking 1.0880, for example.
• Sell stop: placed below the current price. You want to sell if the market breaks support, for example 1.0810.

An easy way to remember it: a limit order bets on a reversal at your level, a stop order bets on continuation beyond your level. A limit order guarantees your price or better, but it may never fill. A stop order turns into a market order once triggered: it gets filled, but slippage is possible.

Stop-limit and OCO: more control

A stop-limit order combines the two. It has a trigger price and a limit price. Example: a buy stop-limit triggering at 1.0880 with a limit at 1.0885. If price breaks 1.0880, a limit order at 1.0885 is sent. You will never pay more than 1.0885, but if price jumps straight to 1.0895 on news, you will not be filled at all.

An OCO order, for One Cancels the Other, links two orders: as soon as one fills, the other is cancelled. It is very handy before an announcement or at the edge of a range. You place a buy stop at 1.0880 above the range and a sell stop at 1.0810 below it. The market picks a direction, you follow, and the second order disappears automatically. Not every platform offers it natively: check yours.

Stop loss, take profit and trailing stop

These three orders are not for getting in, but for getting out. They attach to an open position or to a pending order.

• Stop loss: closes your position if the market moves against you to a given level. It is an exit stop order. It caps your loss, but if price gaps it can be filled further away than planned.
• Take profit: closes your position when your target is reached. It is an exit limit order, filled at your price or better.
• Trailing stop: a stop loss that moves with price when it goes your way, at a fixed distance, but never moves back.

For the trailing stop, take a 30-pip distance on a buy at 1.0820. At the start, the stop is at 1.0790. If price climbs to 1.0870, the stop moves up to 1.0840: you are now sure to exit with a profit as long as price does not gap. If price falls back, the stop stays at 1.0840. Careful: on MetaTrader, the trailing stop is managed by your platform and only works while it stays open and connected.

Which order to use in which situation

Before sending a pending order, always check three things: the direction (buy or sell), the type (limit or stop) and the expiry. Many expensive mistakes come from a buy stop placed instead of a buy limit, or a forgotten order that fills days later. Remember too that no order type removes risk: leveraged trading loses money for the majority of retail traders.

To practise, place a stop loss on the chart below. Each time, ask yourself which level would invalidate your trade idea: that is where your stop belongs, not at a distance picked at random.