Knowing trading order types is important to help traders choose the one that suits their needs at a specific time. Trades always consist of at least two orders. One to get into the trade and the other one to exit the trade.
Order types for trading stocks, currencies and futures are the same. If a trader enters a trade with a sell order, then, he will exit the position with a buy order or vice versa.
There are various types of orders that traders can use in various combinations. But, here are 6 main order types that you need to know.
1. Market Orders (MKT)
In market orders, traders buy or sell at the current price. A trader will fill the market orders in an active market, but not always at the exact price that the trader wants.
For instance, a trader may place a market order when the best price is 1.2954, but other orders might get filled first. Consequently, the trader’s order might get filled at 1.2955 instead.
Traders use market orders when they want their order to get processed even at slightly different prices. If a trader is buying then the market orders get filled at the asked price, as that price is the price someone else currently wants to sell.
While, if a trader is selling, then the order will get filled at the bid price, as that price is the price someone else currently wants to buy.
Also read: FOMC Meeting and How it Affects the Market
2. Limit Orders (LMT)
In limit orders, traders buy or sell an asset at a specific price or better. But, a limit order may or may not get filled depending on how the market is moving.
For instance, if a trader wants to buy and places a limit order with a price of $50.50, the order would only get filled at $50.50 or better. In this case, a better price would be below $50.50.
Traders usually use limit orders when they want to make sure that they get a suitable price. While they are willing to risk not being filled at all.