Understanding order types is essential for executing trades effectively. The wrong order type can cost you money through poor execution or missed opportunities. This guide explains each order type, when to use it, and common mistakes to avoid.
Why Order Types Matter
When you want to buy or sell a stock, you need to tell your broker exactly how to execute the trade. Different order types give you different levels of control over price and execution. Choosing the right one can mean the difference between a good fill and a bad one.
Key concept: There is always a trade-off between price certainty and execution certainty. Market orders guarantee execution but not price. Limit orders guarantee price but not execution.
Market Orders
A market order tells your broker to buy or sell immediately at the best available price.
How It Works
- Your order is sent to the market
- It fills at whatever price is currently available
- Execution is essentially guaranteed during market hours
Market Order Example
Stock XYZ is showing: Bid $49.95 | Ask $50.05
You place a market order to buy 100 shares.
Your order fills at $50.05 (the ask price).
Total cost: $5,005
When to Use Market Orders
- Trading highly liquid stocks (SPY, AAPL, etc.)
- When you need immediate execution
- When the bid-ask spread is tight (a few cents)
- During regular market hours
When to Avoid Market Orders
- Low-volume stocks with wide spreads
- Pre-market or after-hours trading
- During high volatility (earnings, news events)
- Very large orders relative to volume
Limit Orders
A limit order sets the maximum price you will pay (for buys) or minimum price you will accept (for sells).
How It Works
- You specify your desired price
- The order only fills at your price or better
- If the market never reaches your price, the order does not fill
Limit Order Example
Stock XYZ is trading at $50.
You place a limit order to buy 100 shares at $49.50.
Scenario 1: Stock drops to $49.50, your order fills at $49.50 or less.
Scenario 2: Stock never drops below $50, your order expires unfilled.
When to Use Limit Orders
- When you want price control
- Trading less liquid stocks
- Placing orders outside market hours
- When you are not in a hurry to execute
Limit Order Tips
- Set realistic prices near current market levels for fills
- For immediate fills, set limit slightly above ask (buys) or below bid (sells)
- Check that your limit price accounts for the bid-ask spread
Stop Orders (Stop-Loss Orders)
A stop order triggers a market order when the stock reaches a specified price. It is commonly used to limit losses or protect profits.
How It Works
- You set a trigger price (the stop price)
- When the stock hits your stop price, it becomes a market order
- The order then fills at the next available price
Stop Order Example
You bought XYZ at $50. You want to limit your loss to $5 per share.
You place a stop order to sell at $45.
If XYZ drops to $45, your stop triggers and sells at market price.
Your actual fill might be $44.90 or $45.10 depending on market conditions.
When to Use Stop Orders
- Protecting against large losses (stop-loss)
- Locking in profits on winning trades (trailing stop)
- Entering a position when a stock breaks out
Stop Order Risks
- Slippage: Your fill price may be worse than your stop price
- Gap downs: Stock can open below your stop, resulting in larger losses
- Stop hunting: Brief price spikes can trigger your stop before reversing
Stop-Limit Orders
A stop-limit order combines a stop order with a limit order. When triggered, it becomes a limit order instead of a market order.
How It Works
- You set two prices: stop price and limit price
- When the stop price is hit, a limit order is placed
- The order only fills at the limit price or better
Stop-Limit Order Example
You own XYZ at $50. You set a stop-limit order:
Stop price: $45 | Limit price: $44.50
If XYZ drops to $45, a limit order to sell at $44.50 is placed.
Risk: If the stock gaps down to $40, your limit order may never fill.
When to Use Stop-Limit Orders
- When you want stop protection but need price control
- In volatile markets where you want to avoid extreme slippage
- When you would rather not sell than sell at a bad price
Warning: Stop-limit orders can fail to protect you in fast-moving markets. If the stock gaps past both your stop and limit prices, your order may never fill, leaving you exposed to further losses.
Time-in-Force Options
You can also specify how long your order remains active:
Day Order
Expires at the end of the trading day if not filled. This is the default for most orders.
Good-Til-Canceled (GTC)
Remains active until filled or you cancel it (usually up to 60-90 days depending on broker).
Immediate-or-Cancel (IOC)
Fills immediately or cancels. Any unfilled portion is canceled.
Fill-or-Kill (FOK)
The entire order must fill immediately, or the entire order is canceled.
Advanced Order Types
Trailing Stop
A stop order that follows the stock price at a set distance. As the stock rises, your stop rises with it. If the stock falls, your stop stays in place.
One-Cancels-Other (OCO)
Two orders linked together. When one fills, the other is automatically canceled. Useful for setting both a profit target and stop-loss simultaneously.
Bracket Order
An entry order with attached profit target and stop-loss orders. When your entry fills, both exit orders become active.
Track Your Order Execution
Pro Trader Dashboard records your actual fill prices so you can analyze execution quality and improve your order strategy over time.
Order Type Comparison
| Order Type | Execution | Price Control | Best For |
|---|---|---|---|
| Market | Guaranteed | None | Liquid stocks, urgent trades |
| Limit | Not guaranteed | Full | Price-sensitive trades |
| Stop | Guaranteed when triggered | None | Stop-loss protection |
| Stop-Limit | Not guaranteed | Full after trigger | Controlled stop-loss |
Common Mistakes to Avoid
- Using market orders on illiquid stocks: You may get terrible fills
- Setting stop-losses too tight: Normal volatility can trigger them
- Forgetting about GTC orders: They can fill days later when you forgot about them
- Not accounting for bid-ask spread: Your limit may never fill if set at the wrong level
Summary
Order types give you control over how your trades execute. Market orders prioritize speed, limit orders prioritize price, and stop orders help manage risk. Master these basics, and you will execute better trades with fewer costly mistakes.
Start simple with market and limit orders, then add stop orders as you gain experience. The right order type depends on your specific situation, the stock's liquidity, and your trading goals.
Continue learning with our guide on reading stock quotes or understand market hours.