How to trade
Type of entry orders
Attaching entry orders can be a great way to automate your strategy – ensuring you enter the market at the price you want. In this lesson, we’ll take a look at the different types of entry orders on offer.
What is an order?
An order is an instruction to your broker to execute a trade within a given set of parameters. To execute at the first available price, you’d use a market order. To execute at a price level set by you, you’d use entry and exit orders.
Using orders can help you to be flexible with your trading decisions and support a range of different trading strategies. They should be a key part of your risk management strategy.
In this lesson we’re going to take a look at orders that enable you to open positions.
What is an entry order?
Entry orders are used to automatically open a position when the market hits a pre-determined level set by you. Don’t have time to watch the market? Entry orders are a great way to ensure you can buy or sell at a certain price without starting at a screen all day.
When used alongside stop losses, entry orders can automate a trading strategy – setting out exactly which levels you’ll buy and sell at. They’re widely used by technical analysts, who look for price patterns in historical data.
Want to know more about technical analysis? Take a look at our introductory course now.
It’s important to note that while the entry order will be executed if the price is met, it’s not guaranteed that the order will be filled at that level, due to slippage.
There are two main types of entry orders: limits and stops. Limit entry orders are placed at a more favourable market price, while stop entry orders are placed at a less favourable market price. It might sound odd to enter a position at a less favourable price, but doing so means you’ll confirm the market is continuing in the same direction. We’ll go into more detail on that in a minute.
There are then variants of these that have additional rules for when the position will be opened, such as one-cancels-other (OCO) orders.
Let’s take a look at each type of entry order available to you.
What is a buy stop order?
A buy stop is an order to buy any given instrument when it has reached a specified price above the current market price. This order will be triggered if the market reaches your set level, at which point it becomes a market order and is executed immediately.
This technique is very common with traders that use ‘pyramiding’ as a way to maximise profits. Pyramiding focuses on adding to existing profitable positions, which are already showing signs of strength.
Buy stop order example
In the example below, you can see how this would be executed on our platform.
Barclays shares are currently trading at £1.46 a share, and an order is placed to buy 5,000 CFDs if the price reaches £2.00. This order will only be triggered if the buy price then goes on to hit 200p (£2.00).
What is a buy limit order?
A buy limit is an order to buy any given instrument at or below a specific price, which is lower than the current market price. This order will be triggered if the market then drops to your specified level, enabling you to take advantage of a cheaper price point.
Buy limit orders enable you to ensure that you’re opening a position at a price you’re happy with. You can also take advantage of a market that gaps lower from one day to the next.
This technique will often be used if a trader believes the market will drop from the levels it is currently trading at and then strengthen again.
Buy limit order example
Say you expect Barclays shares to fall from their current price of £1.46. You place a buy limit order to purchase 5,000 CFDs if the share price drops to 100p (£1 a share). This order will only be triggered at £1 a share, and at that point a buy position would be opened for 5,000 contracts at 100p.
What is a sell stop order?
A sell stop is an order to sell any given instrument when it falls below a specific price. This will be triggered if the market drops to your specified level. While sell stop orders are commonly used as stop loss orders, to limit risk when the market turns against a long position, they can also be used to enter a short trade.
Sell stop order example
You believe Barclays shares are going to fall in value from their current price of £1.46 per share. To capitalise on this decline, you place an order to sell 5,000 CFDs at 100p (£1) a share. This order will only be triggered if the price drops to 100, and at that point a sell position will be opened.
Similar to a buy stop, these orders can be used to open a new sell position or add to existing profitable trades at levels below the current market price.
What is a sell limit order?
A sell limit is an order to sell any given instrument when it reaches a set price that is above the current market price. Similar to a buy limit, these can be used in an attempt to open a short position at a more favourable price than the market is currently trading at.
This will often be used in technical trading, looking for the market to hit key levels and looking for potential trend reversals.
Sell limit order example
Let’s say you thought Barclays’ share price was going to rise briefly from its current price of £1.47 before it fell significantly. By opening a short trade at the higher price, you’d earn a greater profit when the market fell. So, you place an order to sell 5,000 CFDs at 200p (£2.00). The stock would need to rise 53 pence, before the order is triggered and the position would be opened, selling 5,000 at £2.00.
What is an OCO entry order?
A one-cancels-other (OCO) order is an instruction to place two orders simultaneously. When market movements cause either to be filled, the unfilled order is automatically cancelled. OCO orders can be used to enter and exit positions, so let’s look at how they’re used to open trades.
One of the most common times that traders will use an OCO entry order is around a big news announcement. If they were of the opinion that the announcement would cause a big market move in either direction, but they were not confident on which direction the market would move, an OCO order would enable them to sell if it drops and buy if it rises.
OCO order example
Let’s say you’re waiting on the US non-farm payroll announcement.
You’ve placed an order to sell 10 Wall Street CFDs if the price drops to 33,450, and then used an OCO to place a corresponding buy order at 34,000. If you’re correct, the market will move and one of the orders will then be triggered. If this happens, the other order will be cancelled, and you’ll still have one open position attempting to follow the trend of the market.
Test your knowledge here
Open a risk-free demo account to practise buying and selling.
Test your knowledge
- A OCO and if-done
- B Buy and sell
- C Stop and limit
- A At a level above the market price
- B At a level below the market price
- A When you think a market price will fall
- B When you think a market price will rise and then fall
- C When you think a market price will fall and then rise