Understanding CFD Order Types
If you’re like most novice investors, you’re probably anxious to jump right in and get started. If that’s the case, keep reading and we’ll outline the various types of orders you’ll use to open and close investment positions.
The Market Order
This is far and away the most common type of order, and the most straightforward. When you place a market order to buy or sell, that order will be executed immediately at the best price available. Note that while this type of order guarantees the execution of the trade, it doesn’t guarantee that you’ll buy or sell at a given price point. The price could be better or worse than the price you intended, since the market order is subject to the best available price at the moment the order is executed.
The Stop Order is one of the most crucial types of orders you’ll use, because this is the mechanism by which you keep your losses under control. Let’s face it, not every trade you execute is going to be a winner, and when you open a position that starts losing money, you need to be able to get out of it cleanly. This is why it’s so important to have a clearly defined “exit strategy” for every trade, and the Stop Order is how you execute that exit strategy. When you enter a position, you should immediately set a Stop Order. Should the price fall to your exit/stop price, the order will be executed. Note that the Stop Order does not guarantee the price you’ll actually sell at, for the exact same reason that a Market Order doesn’t guarantee price. What happens is that the order is triggered when your Stop Price is met, but the actual sale price will depend on the market conditions of the moment.
The essence of the Limit Order is that it is a command to the broker to sell if/when the share price hits a certain threshold. There are actually a number of ways to use this. For instance, let’s say that the current price of a stock is $100, but you don’t want to pay $100. You could set a Limit Order, instructing your broker to take a position in the stock should the price fall to $90, or whatever threshold you set. If the price never hits that number, the order simply won’t be executed.
You could also use a limit order to close out a position and take profits. For example, let’s say you bought shares in a company at $100. You could set a limit order at $120. If and when the share price hit this threshold, your broker would sell and you’d capture those profits. Note that you may lose additional profits because there’s a chance that the share price could go higher, but this locks in the profits gained to that point. In a similar vein, you could use a limit order just like you’d use a Stop Order, to mitigate your losses. Bear in mind, however, that as with the other orders discussed above, this order does not guarantee your selling price, which is subject to the market conditions at the time the sale is executed.
This is a kind of “combination” order, combining the features of the stop order and the limit order. In other words, you can simultaneously set your stop price and your limit price that would allow you to take profits on a trade. If one of the two happens, the other order is automatically cancelled and the trade is considered to be concluded. This type of order is most useful to traders who do not want, or simply don’t have the time to closely monitor all their various trading positions. Think of it as a type of “auto pilot” for investing. It is a way of completely defining your risk, and defining buy/sell orders in both the profit and loss direction.
If Done Order
The “If Done” Order functions the same way that a “One Cancels The Other” order, but with one important distinction. The “One Cancels The Other” order involves the selling price (at a profit or loss) for the same asset, while the “If Done” order is a way of linking two different trades together, with the second trade being contingent on closing out the first.
So for example, let’s say you buy shares of Company A, and set a limiting price to take profits at a certain level, and a stop price to mitigate your losses. The “If Done” trade will remain inactive until you close out the first position. The only time the second position (Company B) is invested in, is if/when the first position (Company A) is closed out. It’s a handy way of linking trades in different companies and helping craft a comprehensive investment strategy.
Buy (Or Sell) On Stop Orders
These types of orders are used to either take advantage of a sudden upswing in price, or a sudden downturn. The idea in either of these cases is that a sudden move in either direction (upward or down) could signal the beginnings of a much larger movement in price, and you’ll be able to reap profits or mitigate losses by taking advantage of the stock’s’ momentum. So for example, you’d place a Buy on Stop order at a price higher than the current market price. The order is triggered if and when the price hits that target. Likewise, you’d set a Sell on Stop order at a price below the current market price, and if/when the stock’s price begins to slide, you can get out of the market before the losses mount and become serious.
There are a few other types of orders you’ll use as you gain more experience, but knowing when and how to use the order types mentioned above will get you off to a strong start in the world of trading. Good luck, and happy hunting!
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