Stop vs limit orders: what are the types of orders in trading?

Stop and limit orders are a great way to manage your trades without having to constantly monitor the market yourself. But which type of order should you be using on which trade? Find out in our guide to the types of orders.

What is an order in trading?

An order is simply an instruction to open or close a trade. You give an order to your provider so that they can execute the trade on your behalf – saving you time, as well as enabling you to lock in profits or guard against loss.

The order level refers to the price at which you want to enter or exit a market, enabling you to set a point at which you want to buy or sell at. It is not a guaranteed level, but rather a price through which the market has to move before your order is triggered.

Types of orders in trading

There are two main types of order: entry orders and closing orders. An entry order is an instruction to open a trade when the underlying market hits a specific level, while a closing order is an instruction to close a trade when the market hits a specific level.

Entry orders are used to open a trade at a particular price, without having to constantly monitor the market. Closing orders, on the other hand, are used to lock in profits if a market is moving in your favour or to cap losses if its price moves against you.

Both orders to open and orders to close come in two different varieties:

1. Stop orders
2. Limit orders

Stops vs limits

A stop order is an instruction to trade when the price of a market hits a specific level that is less favourable than the current price. If you were buying a market, this would be below the current market price, and if you were selling a market this would be above the current market price.

On the other hand, a limit order is an instruction to trade if the market price reaches a specified level more favourable than the current price. If you are looking to buy a market, this will be lower than the current market price, whereas if you are looking to sell it would be higher.

There is no reason to only use one or the other type of order – both are extremely useful tools for a trader. In fact, some platforms go so far as to combine both orders into a single ‘stop-limit order’. This would enable traders to predefine their conditions for trading, entering a trend at a certain price level and exiting the trade once they’ve taken a certain amount of profit.

So, it is important to understand both stops and limits, and how you can use them in your trading.

What you need to know before placing a stop or limit

Before you start to trade using stops and limits there are a couple of key factors to consider, including the duration of your order, and the influences of gapping and slippage on execution.

Order duration

Order duration refers to the length of time your order will remain open until it expires. You can choose to leave your order open until you decide to close it or set an expiry date. These two types of order duration are called good 'til cancelled (GTC) and good 'til date (GTD).

• Good ‘til cancelled: GTC orders remain working until you cancel them yourself, or until they have been filled
• Good ‘til date: GTD orders require you to select a specific date and time that you want your order to run for – if it has not been filled by this date, it will be cancelled

Gapping and slippage

It’s worth noting that stops don’t always close your trade at exactly the level you specify. The market may 'gap', which means it jumps from one price to another with no market activity in between.

This is most likely to happen when you keep a trade open overnight or over the weekend, when the market’s opening price may differ from its previous closing price. In this situation, your trade will be closed at the best available price, meaning you risk losing more money than you’d anticipated. This is known as experiencing slippage. You can mitigate the risk of slippage by using a guaranteed stop, as explained in the section that follows. A small premium is payable if a guaranteed stop is triggered.

Limit orders will usually be filled at your chosen price, or sometimes even a better price if one is available at the moment the order becomes filled – this is called positive slippage.