How to place trade and make profit
You’ll need to give your broker or trading provider the details so they can buy or sell on your behalf, and this is called placing an order.
What is an order?
An order is simply an instruction to buy or sell an asset.
There are various types of order, enabling you either to trade immediately or to wait until certain market conditions occur.
Once you’ve placed an order, you’re free to turn your attention away from trading and leave the order to get on with the job in your absence. Depending on the type of order you choose, it can automatically:
- Open a trade at the time when you judge the conditions are just right.
- Lock in profits by closing a trade when your target level is reached.
- Limit losses by closing a trade when the price moves against you by a certain amount.
- You’ll see how to choose the right order to do each of these things as we go through the different types in detail below.
If you simply want to deal immediately at the best price available, a market order is the one to use.
Provided the market is liquid enough – in other words, if there are enough willing buyers and sellers around at the time – your market order will be executed immediately.
An order that has been executed is called a ‘filled’ order.
It’s important to be aware that market orders can be filled at a worse price than the current bid/ask price. We’ll explain how this happens later in this course.
On occasions when you want to wait until a price reaches a more favourable level before you trade, you’ll need to use a limit order.
A limit order is an instruction to trade if a market’s price reaches a particular level that’s more favourable than the current price.
Let’s say GBP/USD is currently trading at 1.5055. Your analysis suggests that if it rises to 1.5065 it’s then likely to fall again, so you decide to sell GBP/USD if it reaches 1.5065.
Rather than sitting in front of your screen monitoring the market, you place a limit order (known as a limit entry order) to open a short trade if the price hits 1.5065. Two hours later, the market does indeed hit this level. Your broker executes your order and you sell GBP/USD.
Your trade then works in the normal way – so if GBP/USD falls as you predicted, you make a profit. If it continues to rise, however, you make a loss.
As well as using a limit order to open a new trade, you can also use it to close an existing position – protecting your profit if you’re concerned the market might change direction and wipe out your gains.
In contrast to a limit order, a stop order is an instruction to trade when the market hits a level less favourable than the current price.
Why would you want to trade at a worse price? Well, perhaps the most important reason is to close a position that’s moving against you. To do this, you attach a stop order to the trade. Then, at the point beyond which the level of loss would be unacceptable to you, your stop will pull the plug and close out the position.
As we’ll explain in the next lesson, when markets are moving very fast it may not be possible to close the position until the price has already passed the level you set, but certainly the stop will give you some protection against escalating losses.
Because it helps restrict your losses, this type of stop order is known as a ‘stop-loss’. Here’s how it works:
Let’s say you own 100 shares of ABC inc which you bought at $37, and now the price has declined to $35. You hope this is just a temporary move, but you decide if the price should fall as far as $32 it will be time to cut your losses. You place a stop-loss at $32.
Unfortunately, the price keeps sliding all the way to $27. However, your stop-loss is triggered at $32 and your position is closed.
You’ve lost $500 (100 x $5), but without your stop-loss you would have been looking at a $1000+ loss.
You can also use a stop order to open a new position – known as a stop entry order.
Placing an order to open a trade at a worse price than the current price might seem very strange, but sometimes it can make good sense.
For example, analysis might suggest that if a market hits a certain level it will carry on moving in the same direction. By setting a stop order at such a level, you would be ready to open a position and potentially take advantage of this momentum.
How are orders executed?
When you place an order to trade, your broker or trading provider should attempt to fill it according to your requirements. However, variable market conditions mean it’s not always possible to execute your order exactly as you hoped. To see how and why this can happen, it’s necessary to understand the process your order goes through after you place it.
When you place a market order, or when a stop or limit order is triggered, your broker or trading provider will immediately look for corresponding orders in the market to match yours.
So if you want to buy 100 shares in ABC plc at 250p, a seller who has placed an order for at least 100 shares at that price will need to be found. If there are no orders available in sufficient size at the price level you want, your order can’t be filled as it stands, unless the broker decides to trade with you from its own inventory.
To cater for this situation, which can be quite common in less-liquid markets, you can often choose to have your order classified in various ways. For example, if you’ve selected a fill or kill order, the broker must fill it immediately in its entirety, or cancel it. Alternatively, an execute and eliminate order will be filled as far as possible at the price you specify, then any remaining part of the order will be cancelled.
Market order execution
As we saw earlier, a market order is an order to deal at the best price currently available, with execution guaranteed if there’s sufficient liquidity in the market. So if you’re using this type of order your broker will source the closest possible deal to the one you want. This might involve filling part of your order at the price you selected and the remainder at the next best price on offer.
Fortunately, for major markets there are usually large volumes of traders looking to buy and sell at any given time. However, if you’re dealing in a less liquid market or in a very large size, you’re more likely to experience difficulty in getting the price you want.
Suppose you place an order today to buy gold if the price rises by $100 from its current level. If the metal failed to hit that price until a date in a years’ time, it’s probably fair to say that you wouldn’t want your order to be filled automatically. Many factors affecting your decision to trade could have changed by then –– not least that you might have got tired of waiting and invested your funds elsewhere.
For this reason, you can normally set the duration for an order, after which it will be cancelled. Here are some of the main classes of order you can choose:
- Good till cancelled (GTC)
Order remains valid until you cancel it yourself or the order is filled. On some exchanges, the order may only be valid for a specified period, so it may be worth checking with your broker.
- Good for the day (GFD)
Order remains active until the end of the trading day on which you place it. Check with your broker to see when your chosen market closes.
- Good till date/time
You must select a date and time when you want your order to be cancelled if it hasn’t been filled.
- Fill or kill (FOK)
If the order can’t be filled in full immediately, it will be cancelled.
- Execute and eliminate
As much of the order as possible will be filled at the price you specify. Any remaining part of the order will be cancelled.