What Is a Conditional Order?
A conditional order is an order that includes one or more specified criteria. Generally conditional orders refer to more complex order types used in advanced trading strategies. The most common type of conditional order is a limit order, which specifies a fixed price above (or below) which a purchase (or sale) cannot take place, although other conditions can exist aside from price, such as how long an order is enforced (known as time-in-force), or if another order must be completed first before the new order is triggered.
- Conditional orders are those which will only be executed or activated in the market if certain criteria are met.
- Limit, stop, stop-limit, and contingent orders are all examples of conditional orders.
- Non-conditional orders, such as market orders, do not have the same restrictions.
- Conditional orders do not guarantee a full or partial execution due to the criteria that must be met.
How Conditional Orders Work
Brokerage firms and discount brokerages offer some standard conditional orders for traders with certain criteria. These orders will typically be limit, stop, and stop limit. Nearly all trading platforms will have these standard conditional order types available for client accounts.
Conditional orders can be used by all types of traders. Discount brokerages will offer basic conditions such as limit, stop and stop limit. More advanced traders will seek to place conditional orders with broader criteria.
Non-conditional orders typically refer to defaulted orders in which the investor does not have specific levels demanded for price or timing. Market orders are one of the most common orders placed by novice traders. These orders have no specified price criteria and are placed at the first available price given following the order submission.
A contingent order is a particular type of conditional order that involves the simultaneous execution of two or more transactions, or the price or execution of another security. These order types may be helpful when placing two trades at the same time or when defining stop-loss points. Specific types of conditional orders like these include one-cancels-other (OCO) orders or order-sends-order (OSO). In an OCO order, multiple conditional orders can be placed with other orders canceled once one has been executed. In a OSO the execution of an order triggers more orders to be placed.
More Advanced Conditional Orders
Advanced conditional orders build on the concepts of limit, stop, and stop limit. They also layer additional criteria to a trade which can help an advanced trader in deploying broader risk management.
Advanced trading platforms such as Interactive Brokers will offer these advanced conditional orders. These conditional orders are also available through some of the popular technical analysis platforms such as: MetaStock, Worden TC2000, eSignal, NinjaTrader, Wave59 PRO2, EquityFeed Workstation, ProfitSource, VectorVest and INO MarketClub.
Advanced conditional orders usually include several conditional variables in the order submission. Trade order variables can be based on price, time, volume, margin cushion, percentage change and more. Various combinations of variables can be used. Traders can also use operators to specify variables such as equal to, greater or less than.
Advanced conditional orders can be used by traders and technical analysts for a wide variety of trading strategies. These orders can help a technical analyst to ensure profits at a specified price point. They may also be used by portfolio managers as risk management.
As a basic example, let's assume XYZ stock is trading at $220 a share, and you want to buy some if there is a dip in before they trading day is out. You can specify a day order with a limit price to buy at $215. Here there are two conditions: the first is a purchase price of $215 or better based on the limit order, and that the order will be working until the end of the trading day, at which point it will be cancelled.
In one more advanced example, consider a technical analyst following a stock with a price approaching its support trendline in a Bollinger Band chart. If they feel a reversal is likely at the support level, they can institute a conditional order to buy call options on the stock. This conditional order would be primarily based on price. Therefore, the order would include an order to buy an option at a specified price when the underlying security reaches a specified price.