Order Types in Trading

Trading involves the use of various order types, each with its own specific conditions and purposes.

It isn’t just about deciding what to buy or sell; it’s also about how you buy or sell.

Understanding these order types is important for traders to effectively manage their trades and risk.

Here, we will explore the most commonly used order types in trading.

Key Takeaways – Order Types in Trading

• Market Orders
  • Adaptive Market Orders
• Limit Orders
  • Marketable Limit Order
  • Non-Marketable Limit Order
  • Buy Limit Orders
  • Sell Limit Orders
• Stop Orders
  • Buy Stop Orders
  • Sell Stop Orders
• Stop-Limit Orders
• Trailing Stop Orders
• Bracket Orders
• One-Cancels-the-Other (OCO) Orders
• Fill-or-Kill (FOK) Orders
• All-or-None (AON) Orders
• Good-Till-Canceled (GTC) Orders
• Immediate-or-Cancel (IOC) Orders
• Pegged Orders
  • Pegged-to-Best Orders
  • Midpoint Pegged Orders
  • Pegged to Market Orders
  • Pegged to Primary Orders
  • Pegged to Limit Orders
• Iceberg Orders
• Discretionary Orders
• Market-if-Touched (MIT) Orders
• Limit-if-Touched (LIT) Orders
• Time-in-Force Conditions
  • Day Orders
  • Good-Till-Date (GTD) Orders

Market Orders

Market orders are the most basic and commonly used order type.

When a trader places a market order, they’re indicating that they wish to buy or sell a security at the best available current market price.

Execution is almost immediate, making market orders suitable for traders who prioritize speed and execution over price control.

Adaptive Market Orders

Adaptive market orders are designed to adjust their execution strategy in real-time based on changing market conditions to achieve the best possible price.

Limit Orders

Limit orders allow traders to specify the maximum price they’re willing to pay for a security (when buying) or the minimum price at which they are willing to sell it.

This order type provides price control but doesn’t guarantee execution, as the market may never reach the specified limit price.

Some use limit orders when they want avoid their transaction data being used in payment for order flow (PFOF). We explain the nuances of this tactic in the FAQ section.

Marketable Limit Order

Executed immediately at or better than your limit price if there’s sufficient liquidity in the market.

Non-Marketable Limit Order

Only executes if the market price reaches your exact limit price or better.

Buy Limit Orders

• Execution Condition – Executed at the limit price or lower.
• Purpose – Used to enter a position at a more favorable price.

Sell Limit Orders

• Execution Condition – Executed at the limit price or higher.
• Purpose – Used to exit a position (or short-sell) at a predetermined profit target.

Stop Orders

Stop orders, also known as stop-loss orders, are designed to limit a trader’s loss on a position.

A stop order becomes a market order once the specified stop price is reached.

Buy Stop Orders

• Execution Condition – Triggered when the market price rises to the stop price.
• Purpose – Often used to protect short positions or to enter a long position as a momentum play.

Sell Stop Orders

• Execution Condition – Triggered when the market price falls to the stop price.
• Purpose – Commonly used to protect long positions or to enter a short position as a type of momentum trade.

Stop-Limit Orders

Stop-limit orders combine the features of stop orders and limit orders.

When the stop price is reached, the stop-limit order becomes a limit order to buy or sell at the limit price or better.

Key Characteristics

• Execution Certainty – Provides price control but may not execute if the market doesn’t reach the limit price.
• Strategic Use – Suitable for traders who wish to control the price at which they enter or exit the market while minimizing the risk of slippage.

Trailing Stop Orders

Trailing stop orders are designed to protect profits by enabling a trade to remain open and continue to profit as long as the price is moving in the trader’s favor.

The stop price is adjusted dynamically, trailing behind the market price by a specified distance.

Functionality

• Adjustment – Automatically adjusts the stop price at a fixed distance or percentage from the current market price.
• Protection – Locks in profits while providing the potential for the trade to capture further gains.

Bracket Orders

Bracket orders are designed to help traders lock in profits and limit losses.

This order type combines three components: an entry limit order and two contingent orders – a stop-loss order and a take-profit limit order.

• Entry Order – A limit order to enter a position at a specified price.
• Stop-Loss Order – If the entry order is executed, this order becomes active, designed to limit the trader’s loss by exiting the position if the market moves against it to a specified price.
• Take-Profit Order – Simultaneously, a limit order to exit the position at a profit if the market reaches a predetermined favorable price.

Bracket orders are useful in setting up a complete trade plan in advance, which allows traders to manage their trades without needing to constantly monitor the market.

One-Cancels-the-Other (OCO) Orders

OCO orders link two orders, a limit and a stop order, where the execution of one automatically cancels the other.

This dual structure allows traders to set both a profit target and a stop-loss level on an open position or pending entry.

Strategic Implementation

Ideal for markets with high volatility, so that either the desired profit is locked in or losses are curtailed without manual intervention.

Fill-or-Kill (FOK) Orders

FOK orders demand immediate execution in their entirety at a specified price or better; otherwise, the entire order is canceled.

This order type is used when a trader requires a specific quantity of securities at a specified price and is unwilling to accept partial fills.

Use Case

Often employed in large trades where the price and quantity executed can significantly impact the trader’s strategy.

All-or-None (AON) Orders

Similar to FOK orders but with less immediacy, AON orders require that the entire order be filled, but they don’t need to be filled immediately.

These orders remain active until they can be completely executed at the specified price or better.

Application

Useful for small-cap stocks or thinly traded markets where filling a large order partially over time could adversely move the market or change the intended trading outcome.

Good-Till-Canceled (GTC) Orders

GTC orders remain active until the trader chooses to cancel them or they’re executed.

Unlike day orders, which expire if not filled by the end of the trading day, GTC orders can span multiple trading sessions.

Long-Term Strategy

Suited for traders who are willing to wait for their price target to be hit, regardless of how long it might take.

Immediate-or-Cancel (IOC) Orders

IOC orders require all or part of the order to be executed immediately after it is placed.

Any portion of the order that cannot be filled immediately is canceled, eliminating the possibility of a partial fill.

Advantage

Allows traders to place large orders while knowing that they’ll only be executed if a significant portion can be immediately filled at the desired price.

Pegged Orders

Pegged orders are advanced orders whose price is dynamically adjusted, or “pegged,” to external references.

This helps traders maintain an order relative to market movements.

These orders are useful in fast-paced markets or when traders wish to hide their order size to avoid market impact.

Pegged-to-Best Orders

Adjusts the order price to match the best bid or offer in the market.

Useful for traders who want to make sure their order remains competitive without constant manual adjustments.

Midpoint Pegged Orders

The order price is continually adjusted to the midpoint of the best bid and ask prices.

Ideal for traders looking for a balance between buying low and selling high while minimizing the bid-ask spread cost.

Pegged to Market Orders

The order is pegged to a market index or a basket of securities.

Will adjust based on the movements of the pegged reference.

Suitable for traders aiming to track market trends or hedge against market movements.

Pegged to Primary Orders

Pegged to the primary market’s best bid or offer, often used in stocks where multiple trading venues exist.

Helps traders get the best price available in the primary (usually most liquid) market.

Pegged to Limit Orders

Combines pegging features with limit orders.

Provides a maximum or minimum price boundary.

Offers traders the benefits of pegging while protecting against unfavorable price movements beyond a certain point.

Strategic Use of Pegged Orders

• Minimizing Market Impact – Continuously adjusts to market conditions, so pegged orders can help large traders execute sizeable orders without significantly affecting the market price.
• Market Following – Pegged orders allow traders to maintain a position relative to the current market price automatically. Useful in volatile markets.
• Cost Efficiency – Midpoint pegged orders, e.g., help in reducing the cost of the bid-ask spread, which can accumulate over many transactions.

Iceberg Orders

These are large orders that are divided into smaller lots and only a portion of the total order is visible to the market at any given time.

Discretionary Orders

These allow the trader to set a range around the specified price where the order can be executed.

Provides some discretion in price and timing.

Market-if-Touched (MIT) Orders

Similar to stop orders, but these become market orders when a specified price is reached.

Limit-if-Touched (LIT) Orders

These become limit orders when a specific trigger price is touched.

Time-in-Force Conditions

While not distinct order types, these conditions specify how long an order will remain active before it is executed or expired.

Examples include Day Orders, which expire at the end of the trading day, or Good-Till-Date (GTD) Orders, which remain active until a specified date.

Intermarket Sweep Orders (ISOs)

Intermarket Sweep Orders (ISOs) are a specialized type of limit order used in electronic trading to quickly execute large orders across multiple exchanges. 

Unlike standard orders, ISOs allow traders to bypass the National Best Bid and Offer (NBBO) rule, which typically requires routing trades to the venue with the best price. 

This makes ISOs especially valuable in high-frequency trading (HFT) and arbitrage, where speed is critical.

When an ISO is submitted, it can be executed immediately by sweeping liquidity from various exchanges simultaneously, without being restricted to the best price. 

This can help traders fill large orders faster and more efficiently, particularly in fragmented markets where liquidity is spread across different venues.

ISOs were introduced as part of Regulation NMS (National Market System) in the US in 2005, which aimed to improve the fairness and efficiency of stock market operations. 

While primarily used by institutional and high-frequency traders, ISOs come with risks, including potential price impact and the complexity of execution across multiple venues.

Notes

• Not all order types may be available on all trading platforms or with all brokers.
• Order types and their execution can vary depending on the liquidity of the security you’re trading.

FAQs – Order Types

What are the core order types?

Market Order

• Instructs the broker to buy or sell a security immediately at the best available price in the market.
• Prioritizes execution speed over price.
• Used when you want to get in or out of a position quickly.

Limit Order

• Instructs the broker to buy or sell at a specified price or better.
• Provides control over your entry/exit price but risks non-execution if the market doesn’t reach your limit price.
• Types:
  • Buy Limit Order – Placed below the current market price.
  • Sell Limit Order – Placed above the current market price.

Stop Order

• Also known as a “stop-loss order” or just a “stop.”
• Becomes a market order once a specified price (the “stop price”) is reached.
• Used for risk management, limiting losses, or locking in profits.
• Types:
  • Buy Stop Order – Placed above the current market price, used to enter a long trade or protect a short position.
  • Sell Stop Order – Placed below the current market price, used to exit a long position or protect against further losses in a short trade.

How do I choose the right order type?

The right order type depends on your trading objectives, risk tolerance, and market conditions:

• Need for Speed – Market orders if execution speed is critical.
• Price Control – Limit orders provide more control over the price at which you enter or exit a trade.
• Risk Management – Stop orders help protect positions and manage risk.

What’s the difference between a stop order, stop-limit order, and trailing stop order?

1. Stop Order – A stop order is an instruction to buy or sell a security when the market price reaches a specified level (the stop price). Once the stop price is reached, the order becomes a market order and is executed at the next available price.
2. Stop-Limit Order – A stop-limit order is a combination of a stop order and a limit order. It’s an instruction to buy or sell a security at a specified limit price or better, but only after the market price has reached a specified stop price.
3. Trailing Stop Order – A trailing stop order is a stop order that adjusts automatically as the market price moves in a favorable direction. It’s designed to lock in profits by adjusting the stop price to a predetermined level below the market price.

Does using limit orders avoid payment for order flow (PFOF)?

Limit orders don’t entirely guarantee PFOF avoidance, but they decrease the chance of your data being used in this way.

So the belief that limit orders avoid PFOF is partially true, but with some important nuances:

How Limit Orders Can Help Avoid PFOF

• Limit Orders Define Your Price – You set a specific maximum price you’ll pay to buy, or a minimum price to sell. Market makers receiving PFOF are less likely to improve upon this price because they can’t extract as much profit.
• Marketable vs. Non-Marketable Limit Orders:
  • Marketable – Your order may still be routed to market makers who engage in PFOF, but they’d need to meet your price.
  • Non-Marketable – These typically execute directly on exchanges, bypassing most PFOF.

Things to Keep in Mind

• Not All Brokers Use PFOF – Some brokers don’t receive payment for order flow.
• Order Routing is Complex – Even with limit orders, your broker may route them to different venues based on execution quality. Some may utilize PFOF, others may not.

Conclusion

Understanding and effectively using the various order types available in trading can significantly enhance a trader’s ability to execute their trading strategy efficiently.

By employing the appropriate order type for different trading scenarios, traders can better manage their entry, exit, and risk management processes.