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Order Types

Difficulty beginner

Overview

Order types determine how your trade is executed. Choosing the right order type is as important as choosing the right direction — a good idea executed poorly can become a losing trade.

Primary Order Types

Market Orders

Definition: Execute immediately at the best available price.

Pros: - Guaranteed execution - Immediate - Simple

Cons: - No price guarantee - Slippage in illiquid markets - Can be exploited by HFTs (latency arbitrage)

When to Use: - Highly liquid markets - When execution certainty matters more than price - Emergency exits

When to Avoid: - Low liquidity securities - During market open/close (volatility) - Around news events

Limit Orders

Definition: Execute only at specified price or better.

Pros: - Price guarantee - Can earn rebates (maker orders) - Control execution cost

Cons: - No execution guarantee - May miss the move - Queue priority matters

When to Use: - Always for illiquid securities - When price matters more than execution certainty - In range-bound markets

When to Avoid: - Fast-moving markets (order won't fill) - When you must exit a position

Stop Orders

Definition: Becomes a market order once stop price is reached.

Stop-Loss (Sell Stop): 

Current Price: $100
Stop Price: $95
If price hits $95 → Sells at market (may fill below $95)

Stop-Entry (Buy Stop): 

Current Price: $100
Stop Price: $105
If price hits $105 → Buys at market (breakout entry)

Pros: - Automatic protection - No need to monitor constantly - Good for breakout strategies

Cons: - Stop hunting (price triggers stop then reverses) - Slippage on execution - Gap risk (overnight moves past stop)

Python Example:

Stop-Limit Orders

Definition: Becomes a limit order once stop price is reached.

Current Price: $100
Stop Price: $95
Limit Price: $94.50
If price hits $95 → Places limit order at $94.50

Pros: - Price protection after trigger - Avoids extreme slippage

Cons: - May not fill at all (gap through limit) - You're left with the position

Advanced Order Types

Trailing Stop

Definition: Stop price moves with the market, maintaining a fixed distance.

Iceberg Orders

Definition: Large order displayed in small visible portions.

Total Order: 10,000 shares
Display Size: 1,000 shares
Book Shows: 1,000 shares (refills after each fill)

Use Case: Large institutional orders to minimize market impact.

Time-in-Force (TIF) Orders

TIF Type Behavior
Day Cancels at end of trading session
GTC (Good Till Canceled) Stays active until filled or manually canceled
IOC (Immediate or Cancel) Fills what it can immediately, cancels rest
FOK (Fill or Kill) Must fill entirely immediately, or cancels entirely
GTD (Good Till Date) Active until specified date

Conditional Orders

One-Cancels-Other (OCO): 

Order 1: Take profit at $110 (limit sell)
Order 2: Stop loss at $95 (stop sell)
If either fills, the other is canceled

One-Triggers-Other (OTO): 

Order 1: Buy at $100
If filled → automatically place:
  Order 2: Stop loss at $95
  Order 3: Take profit at $110

One-Triggers-One-Cancels-Other (OTOCO): 

Entry: Buy stop at $105
If filled → simultaneously place:
  Take profit at $115
  Stop loss at $98
  (TP and SL are OCO)

VWAP/TWAP Orders

VWAP (Volume Weighted Average Price):

TWAP (Time Weighted Average Price): - Split order into equal parts over time - Execute at regular intervals - Reduces market impact

Order Execution Priority

Queue Priority (Price-Time)

At price $100.00:
1. Order A: 500 shares @ 10:00:01.000  ← First
2. Order B: 200 shares @ 10:00:01.150  ← Second
3. Order C: 1000 shares @ 10:00:02.000 ← Third
4. Hidden Order D: 300 shares @ 10:00:00.500 ← Hidden (behind displayed)

A buy market order for 600 shares:
- Fills 500 from A (Order A complete)
- Fills 100 from B (100 shares remaining in Order B)

Rebate Structure

Order Type Pays/Receives Typical Rate
Maker (adds liquidity) Receives rebate $0.0020-0.0030/share
Taker (removes liquidity) Pays fee $0.0025-0.0035/share

Implication: High-frequency strategies often profit from rebates alone.

Order Selection Decision Tree

Do you need guaranteed execution?
├── Yes → Market Order
│         └── Is liquidity low?
│             ├── Yes → Expect significant slippage
│             └── No → Good choice
│
└── No → Limit Order
          └── Do you want to provide liquidity?
              ├── Yes → Post limit order away from NBBO
              └── No → Aggressive limit at/near NBBO

Do you need to protect a position?
├── Yes → Stop Order
│         └── Is gap risk a concern?
│             ├── Yes → Stop-Limit (accept non-fill risk)
│             └── No → Regular Stop (guaranteed exit)
│
└── No → Evaluate other types

Is this a large order?
├── Yes → Use algorithmic execution (VWAP, TWAP, Iceberg)
│
└── No → Standard order types sufficient

Slippage

Definition

Difference between expected execution price and actual fill price.

Expected Price: $100.00
Actual Fill: $100.05
Slippage: $0.05 per share (0.05%)

Slippage Components

Component Description Mitigation
Spread Bid-ask spread cost Use limit orders
Impact Your order moves the market Use algos, trade patiently
Timing Market moves while order routes Faster execution, co-location
Latency Network/processing delay Better infrastructure

Common Mistakes

Mistake Consequence Fix
Market orders in illiquid stocks Severe slippage Always use limits
Stops too tight Whipsawed out Use ATR-based stops
Stops at round numbers Stop hunting Place stops below support
Limit too far from market Never fills Be realistic about price
Ignoring time-in-force Stale orders execute Set appropriate TIF
Not using OCO Double risk exposure Always bracket trades

Best Practices

  1. Always Use Limits — Unless execution certainty is paramount
  2. Avoid Market Orders at Open — First 5 minutes are chaotic
  3. Size Matters — Large orders need algorithmic execution
  4. Check Liquidity — Look at depth before placing orders
  5. Use Brackets — Entry + stop + target as OCO/OTO
  6. Monitor Partial Fills — Large orders may fill in pieces
  7. Understand Rebates — Maker-taker affects cost basis

Next Steps