This chapter is an extension to the chapter on key terminologies, except here we will look at the various stock order types. Here we will dive into some of the most important definitions that you will encounter in day trading: Order Types. These are the backbones that make up the mechanics of day trading. Generally, most investors would like to go into a market and buy low and sell high. That’s an intuitive concept that is best exemplified by value investing. Value investors typically like to buy a stock when it is on discount and sell it when the price of the stock rises to its true market value.
In day trading, as you might have already known, it is possible to make money even as the stock price is going south. This is termed as shorting a stock. So without further ado, let’s go through some of these key ideas:
Going long in a trade means that you expect the stock price to rise over time. You make a trade with someone in the market at the current market price, and expect to sell this stock in the near future when it has risen. Going short is the exact opposite – you expect the stock price to drop over time. So what happens here is you will borrow this number of shares from your broker and sell it at the current market price first. When the price has dropped, you will then buy it back to return the stocks to your broker. If you work this out, it turns out that you will make a profit of the difference. The dangerous thing about going short is that your losses can be huge if the trade turns against you. Imagine if the stock price goes up instead of down, there is theoretically no limit to the amount it can shoot up to, as with your losses.
Whenever you wish to trade a stock, you need to find either a matching buyer or a matching seller. This is the law of demand and supply. When you use a market order, you are basically telling the broker to buy or sell at the current best market price that is available. This kind of order usually has little to no lag time and will be executed almost immediately. While you are guaranteed to get the trade, you are presenting yourself to a potential risk of the price spiking or plummeting right before your trade actually gets through. As a result, even though your execution is guaranteed, the price at which it is executed may deviated, sometimes largely from what you expected it to be. Unless you are in dire situation and absolutely need to take out all your cash form the market, we would usually recommend going for Limit orders.
What are limit orders? Contrary to market orders, limit orders instruct a broker to only execute a trade, buy or sell, at a specific price set by the trader. If you enter a limit sell order, the broker will not sell the shares until the market price has risen above the price specific. Similarly, if you enter a limit buy order, the broker will not buy the shares until the market price is below the price specified. Unlike a market order where the execution is guaranteed, limited orders do not guarantee a fill of your orders. As such, if your order never gets filled, it may represent a missed trading opportunity.
However, this is not entirely bad news as you will discover. Missed trading opportunities are part and parcel of a trader’s career.
All or Nothing Order is commonly found as a configurable option on the trading software you are using. An AON order will not be executed if the order cannot be filled entirely during the trade. For example, if you want to purchase 5000 shares of ABC Company at $3.50 with an AON limit order of $3.40. The share price briefly dropped below $3.40 but immediately went back up to $3.50. As a result, your order is not filled completely, perhaps only 3000 shares at $3.40 available. In such scenarios, your order will not be executed at all. Partial order, as the name suggests, will allow your orders to be fulfilled partially. If we used the example shown above, you will end up with 3000 shares instead of the 5000 shares you initially wanted. Using Partial order insures that you do not miss the trading opportunity when you see one.