Introduction
When day trading, understanding order types like limit orders and stop orders is crucial for managing risk and maximizing profits. These tools help traders execute strategies precisely while minimizing losses. This guide will break down the differences, use cases, and best practices for each.
Table of Contents
- Market Orders: The Basics
- Buy Stop Orders
- Sell Stop Orders
- Limit Orders Explained
- Key Differences Between Stop and Limit Orders
- Marketable Limit Orders: A Trader’s Best Friend
- FAQs
Market Orders: The Basics
👉 Mastering market orders starts with knowing their risks. A market order instructs your broker to buy/sell immediately at the current price—whatever that may be. While fast, it offers no price control, potentially leading to unfavorable fills due to bid-ask spreads or slippage.
Example:
- Bid-Ask Spread: $11.95-$11.97
- Market Order: Buys at $11.97
- Sudden Surge: Price jumps to $12.15 before execution
- Result: Order fills at $12.15 (15¢ slippage).
Risk Alert: Market orders are like blank checks—efficient but unpredictable.
Stop Orders Explained
A stop order (or stop-loss) triggers a market order once a price threshold is breached. It’s essential for risk management, especially when you can’t monitor trades actively.
Types:
- Buy Stop: Activates above current price.
- Sell Stop: Activates below current price.
Example:
- You buy FB at $155; it rises to $185.
- Set a sell-stop at $170 to protect gains.
- If FB drops to $170, it triggers a market order (actual fill may vary).
Caveat: Stop orders can exit positions prematurely during volatility.
Limit Orders Explained
A limit order sets a maximum/minimum price for execution. It ensures price control but risks non-fill if the market moves away.
Example:
- Place a buy-limit for TVIX at $34.75.
- Order only fills if price hits $34.75 or lower.
Pro Tip: Use limit orders to avoid overpaying or underselling.
Key Differences
| Feature | Limit Order | Stop Order |
|-----------------|----------------------|----------------------|
| Price Control | Yes | No (post-trigger) |
| Execution | At/better than set price | Market price post-trigger |
| Risk | Partial/fill risk | Slippage risk |
👉 Advanced order strategies blend both types for optimal results.
Marketable Limit Orders
These hybrid orders combine immediacy with price limits. Specify a range (e.g., "ask +5¢"), and the broker fills as much as possible within that range.
Day Trading Example:
- Stock: TVIX
- Ask: $34.77
- Order: "Ask +5¢" → Max buy price: $34.82
- Outcome: Filled up to $34.82.
FAQs
Q: When should I use a stop order vs. a limit order?
A: Use stop orders to cap losses during volatility; limit orders for precise entry/exit prices.
Q: Can a limit order guarantee execution?
A: No—it only guarantees price, not fill.
Q: Why might a stop order fail?
A: Slippage can push the fill price beyond your stop level in fast-moving markets.
Conclusion
Choosing between limit and stop orders hinges on your strategy:
- Limit orders = Price precision.
- Stop orders = Risk management.
For day traders, mastering both—plus marketable limit orders—is key to disciplined trading. Always weigh the trade-offs and test strategies in simulated environments.