2 Types of Market Orders
Hey guys, Rishi Patel, co-founder of Master the Markets, Elite Traders Conference and The Traders Open Day.
A very warm welcome to this video where we’re going to discuss the two types of market orders.
What are the two types of market orders? I hear you ask. It ties into a video we made a little earlier which talked about broker automation. When we place trades with a broker account, they generally tend to ask for a type of order that you’re actually placing.
The first type of order that you can place with a broker is what’s called a stop order. This can be either a buy stop or a sell stop. This buy stop or sell stop can be an opportunity to enter the market, let’s talk about buy stops, at a worse price than where the market is currently trading. That’s very important to note, a worse price than where the market is currently trading.
The second type of order that you can place with a broker, you may have guessed it already, is a limit order. A limit order is basically the type of order where you’re getting in at a better price than what the broker is offering.
How can we apply this in a real life scenario? For example, let’s say you’re in the market for a Rolex watch. You know that the market price for a Rolex watch is say £5,000. You’ve done your research on it and you know that the specific model that you really like is £5,000. Now you walk into a shopping mall and you’re looking to make a purchase. You walk into Rolex and you actually notice that they have a current price of £5,500. That, if you were to make a purchase, would be known as a buy stop order because you’re getting into the market at a worse price than where the market is currently trading. That would be a buy stop order.
Let’s talk about a limit order. How does the same concept apply? Let’s say you’re still in the market for this Rolex watch and you know that it is £5,000, but this time you walk into Rolex during the Christmas sale. This time you know that the market is trading still at £5,000 – that’s what the value of that Rolex watch is – but this time, because they’re taking part in the Christmas festivities and just post-Christmas there tends to be a sale, they’re actually advertising this watch for a one time price of £4,500. Now that would be what we would call a limit order. If you were to make a purchase at £4,500 you’re actually getting in at a better price than where the market was initially trading. So this is a limit order.
How do we apply the exact same example over to, let’s say, GBP/USD. As of today GBP/USD is currently trading at 1.3090. That’s the price of the pound against the US dollar. Let’s say, for example, we wanted to enter the pound against the US dollar at a price of 1.3170. You would place an automated order to open with your broker account at 1.3170 and that would be a buy stop order. You’re looking to enter the market at a worse price than where it currently is. You would place that as an automated order to open and you would place that as a buy stop order. So that’s a stop order and in this case specifically this is a buy stop order. That’s very important to note.
Now for the same example on the GBP/USD entering as a limit order. Again, as of today the GBP/USD is trading at 1.3090. Now if you wanted to enter on a limit order and you wanted to buy the market, what you would do is you would give the broker an instruction to enter you at a better price than where the market is currently trading. So that means to say that you would enter the market, for example, at let’s say 1.3010. You’re getting in at a better price than what the market is currently offering. So when the market comes down, and if the market comes down more importantly, you will be entered as a buy order at that particular price level.
So these are the two types of market orders that you can use to trade the market.
I trust that adds value and until the next time, stay disciplined, follow your plan and Trade like a Master.