Placing Your Trades: Understanding Market, Limit, and Stop Orders

Beginner’s Guide: Post 13
Okay, so you’re staring at your chart, you’ve deciphered the candlesticks (nice job on that, by the way!), and you’ve decided, “Yep, I want to buy!” or “Uh oh, time to sell!” …Now what? How do you actually make that happen?

You do it by placing a trading order. This is basically just an instruction you send to your broker through your trading platform, telling them exactly what you want to buy or sell, how much of it, and how you want the trade executed.

Why are there different types of orders? Well, because sometimes your main goal is speed (“Get me in NOW!”), and sometimes your main goal is getting a very specific price (“I only want to buy if it drops to this level”). Different tools for different jobs, right? Let’s look at the main three workhorses you’ll use all the time:

1. Market Orders: The “Get Me In/Out NOW!” Button

This is the simplest one. A Market Order basically tells your broker: “Buy [this stock] for me immediately at the best price currently available in the market,” or “Sell [this stock] for me immediately…”

• The Good: It’s fast. Usually, your order gets filled almost instantly, as long as there are buyers and sellers available. If you absolutely need to get into or out of a trade right this second, a market order is often the quickest way.
• The BAD (and Ugly): Slippage! Here’s the catch, and it’s a big one. “Best available price” might not be the exact price you saw on your screen a split second ago. Especially if the market is moving fast, or if you’re trading something that doesn’t have a ton of buyers and sellers (we call that ‘illiquid’). The price might slip against you between the time you hit the button and the time your order actually executes. This difference is called slippage, and it can eat into your profits or make your losses bigger. Imagine trying to buy at $10.00, but by the time your market order hits, the best offer is $10.05. You just paid 5 cents more per share than you expected – that’s slippage.
• When Might You Use It (Carefully)? Honestly, many experienced day traders try to avoid market orders precisely because of slippage. But you might consider it if speed is absolutely critical AND you’re trading something with huge volume where the price isn’t jumping around like crazy (think very popular stocks). Even then, be aware of the risk.

2. Limit Orders: The “Only at MY Price (or Better)” Command

This is where you get more control. A Limit Order lets you set a specific price for your trade.

• A Buy Limit Order says: “I want to buy [this stock], but only if the price drops down to $[your specific price] or lower.” You place this order below the current market price, hoping for a dip.
• A Sell Limit Order says: “I want to sell [this stock], but only if the price goes up to $[your specific price] or higher.” You place this order above the current market price, hoping to sell into strength.
• The Good: Price control! Your order will only execute at your specified limit price or a better price for you (lower for buys, higher for sells). No nasty slippage surprises on the entry or exit price itself.
• The Catch: There’s no guarantee your order will ever get filled. If the price never reaches your limit level, your order just sits there, unfilled. You might miss the trade entirely if the price takes off without you or doesn’t dip low enough.
• When to Use It: All the time! Limit orders are fantastic when getting the right price is more important than instant execution. Great for setting specific entry points based on your chart analysis (like buying near a support level) or for taking profits at a predetermined target price.

3. Stop Orders: The “Trigger” Order (Especially for Safety!)

Stop orders are a bit different. They lie dormant until the market price hits your specified “stop” price. Once that price is touched, your stop order triggers and becomes a Market Order.

• A Buy Stop Order is placed above the current market price. It triggers a market order to buy if the price rises up and hits your stop level. Why do this? Sometimes traders use it to jump into a trade if the price breaks out above a key resistance level, thinking it will keep going higher. It can also be used to cover a short position (we won’t dive into shorting basics here, but it’s an application).
• A Sell Stop Order is placed below the current market price. It triggers a market order to sell if the price falls down and hits your stop level. This is the one you’ll hear about most often because it’s the primary way traders set a Stop-Loss. It’s your automated safety net to get you out of a losing trade before things get really ugly.
• The Good: They automate your actions. You don’t have to be glued to the screen to manually exit if things go wrong (for a stop-loss) or to jump in on a breakout.
• The Catch: Remember, once triggered, it becomes a Market Order. That means… yep, it’s subject to slippage again! If the price is crashing hard when your sell stop (stop-loss) triggers, your actual exit price could be significantly lower than your stop price. It gets you out, which is the main goal of a stop-loss, but maybe not at the exact price you hoped for.
• When to Use It: Definitely for setting Stop-Losses (we’ll dedicate a whole post to why this is crucial later – What is a Stop-Loss Order and Why You MUST Use It). Sometimes used for entering trades on breakouts, though limit orders are often preferred for entries if possible.

Quick Mention: Stop-Limit Orders

Just so you know they exist, there’s also a hybrid called a Stop-Limit Order. Like a stop order, it triggers when the market hits your stop price. But instead of becoming a market order, it becomes a Limit Order at a limit price you also set.

• The Idea: Combines the trigger of a stop with the price control of a limit. You won’t get filled worse than your limit price.
• The Risk: After it triggers, if the price blows right past your limit price without filling you, you might not get out at all, which can be dangerous, especially for a stop-loss in a fast market.
• For Beginners? Honestly, stick with mastering Market, Limit, and regular Stop orders first. They cover 95% of what you need initially.

Putting It Together: Basic Scenarios

So, how might you use these?

• Getting Into a Trade: See a setup you like? You could use a Market Order if you absolutely need in now (and accept slippage risk). Or, you could set a Buy Limit Order below the current price hoping for a small dip to get a better entry. Or maybe set a Buy Stop Order above a resistance level to enter only if it breaks out.
• Taking Profits: Got a winning trade? You could set a Sell Limit Order at your target price to automatically sell if the price reaches it.
• Cutting Losses: This is key! Before you even enter a trade, you should know where you’ll get out if it goes wrong. You’d place a Sell Stop Order (your stop-loss) below your entry price to automatically cut your losses if the trade moves against you. More on this soon!

Wrapping Up: Know Your Orders!

Phew! Okay, that was a lot, but understanding these order types is fundamental. Let’s quickly recap the main players:

• Market Order: Fastest way in or out, but watch out for slippage!
• Limit Order: You control the price (or better), but you might not get filled.
• Stop Order: Triggers an action (usually becomes a market order) when a certain price is hit. Essential for stop-losses.

Getting comfortable with which order type to use in which situation is vital for actually putting your trading ideas into practice effectively and managing your risk. My best advice? Fire up that demo/paper trading account we talked about and practice placing all these different order types. See how they behave. Get a feel for them before you use them with real money!

What’s Next?

Now you know the commands to send to your broker. But sometimes, even if you place your order perfectly, getting it filled easily and at a good price depends on what’s happening in the market itself. Two crucial concepts that really impact this are Liquidity and Volume. Ever wondered why some stocks seem easier to trade than others? These two ideas hold the key.

Let’s explore why they’re so important in What is Liquidity and Volume? Why They Matter to Day Traders