1. Order types: market, limit, stop and their variants
Theory 2: How trading actually works
You can get the direction of the move exactly right and still lose money on the trade. All it takes is choosing the wrong order type.
You already know what a share is, how its price is formed and who takes part in the market. Now for the mechanical part: how your decision to buy or sell is translated into a real order.
The market order: speed in exchange for uncertainty
The simplest order is the market order. You tell your broker to 'buy' or 'sell' now, at the best price available at that instant, without specifying any particular price.
It is filled almost immediately, because it demands that nobody accept a condition. It simply crosses against whatever is available in the order book at that second.
The advantage is speed and certainty of execution. The drawback shows up in an illiquid asset, or in a moment of high volatility: the final price can be quite different from the one you saw on screen just before you hit the button. That phenomenon is called slippage, and we will cover it in detail later in this level.
The limit order: price guaranteed, execution not
The limit order solves exactly that problem. You specify the maximum price you are willing to pay when buying, or the minimum price you will accept when selling. The order is only filled if the market reaches that price or better.
You gain full control over the price, but you lose the guarantee of execution. If the price never reaches your limit, your order sits there indefinitely, or until you cancel it. And you may miss a move you did want to capture.
Here is the central trade-off in almost every trading decision: speed of execution versus control of price, and you can almost never have both at once.
Stop orders: not for getting in, but for getting out
There is a third family, the stop orders, designed not so much for entering as, above all, for limiting losses or protecting gains.
A stop-loss order is triggered when the price falls to a level you define. At that moment it automatically becomes a market order that sells your position. It is a safeguard, so you do not have to watch the screen constantly, or rely on your own discipline in the heat of the moment.
The problem is the same as with market orders. In a sharp move — a 'gap' after bad news overnight, for example — your stop can be filled well below the level you set. Once triggered it becomes a market order and takes the first available price, not the exact price you marked.
The stop-limit: the same tension, now on the way out
To mitigate that there is the stop-limit, a hybrid variant. When the trigger level is reached, instead of becoming a market order it becomes a limit order at a price you define.
You gain control over the exit price. But you take back on the risk that, in a very sharp move, your limit never gets filled and you are left holding the losing position open.
It is the same tension between certainty of execution and control of price, applied now to the exit rather than the entry.
The trailing stop: a level that rises but never falls
There is one more variant worth mentioning, because it underpins many automated strategies: the trailing stop.
Instead of fixing an absolute trigger price, you fix a distance — in euros or as a percentage — from the highest price reached since you opened the position. From then on it works to an asymmetric rule:
- If the price rises, the stop level rises with it, always keeping that distance.
- If the price falls, the stop level stays put where it was, never retreating.
It is a mechanical way of 'letting profits run while protecting capital', without having to decide manually each day where to move the stop.
What an order does not do
One common beginner confusion is worth clearing up. None of these orders 'predicts' anything or 'decides' anything for you, in the sense of choosing when to enter.
They are simply conditional instructions that carry out a specific action when a specific price condition is met.
The intelligence remains entirely yours, or your algorithm's when we get to that part of the course:
- When to enter.
- At what size.
- Where to place the stop.
The order is only the tool that turns that decision into a real execution in the market.