A trade order instructs a broker to enter or exit a position. At first, placing trades may seem overly simple: push the "buy" button when entry conditions are met, and push the "sell" button when it's time to get out. While it is possible to trade in this simplified manner, it is not very efficient, as it requires constant monitoring and it exposes traders to unnecessary financial risks.
Traders who use only the buy and sell buttons may experience losses from slippage and from trading without a protective stop-loss order. Slippage refers to the difference between the price the trader expected and the price at which the trade is actually filled. In fast-moving markets, slippage can be substantial and the difference between a winning and losing trade. Certain order types allow traders to specify exact prices for trades, thereby minimizing the risks associated with slippage.
Protective stop-loss orders, on the other hand, limit trading losses by creating a "line in the sand" past which traders will not risk any more money. These orders automatically close out losing trades at pre-determined price levels. By utilizing advanced order types, a protective stop-loss order can be placed in the market as soon as a trade is entered. This can be especially important to active traders in a fast-moving market when a stop-loss could be reached within seconds of being filled on an order.
Modern trading platforms allow traders to use a multitude of order types to add precision and protection to their trading methodologies. Knowing when to trade is only part of trading; successful traders must also know how to trade, and which order type is appropriate for a given situation. This introductory guide will explain the various order types - from basic to advanced - and provide examples of how each is used by today's traders.
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