Order types and order restrictions explained - overview and differences

When trading with securities, stocks, and cryptocurrencies different order types and order restrictions play a key role. To be successful, it is important to understand the different order types, as they determine how a buy or sell order is processed. Whether you want to react quickly, get the best price or limit your losses – there is a suitable order type for every strategy. In this guide, we explain everything you need to know about order types and how you can easily use them for the proper purpose. You will learn about the different order types and get to know practical examples.

• Order types control the buying and selling of stocks or securities in trading

• Market orders, for example, are ideal for fast execution, while limit orders offer more control over the execution price 

• Stop-loss orders help to minimise losses by automatically selling when the price falls below a specified level by a sufficient distance 

• With a trailing stop order, the stop price adjusts dynamically to the rate trend and always remains at a defined distance from the current market price

What are order types simply explained?

Order types determine how an order for stocks or other securities is executed on the exchange. An "order" is therefore a request investors place with brokers to buy or sell a certain quantity of a security at a certain price. There are various order types so that such an order can be executed according to individual objectives. These help to either achieve the best price, minimise losses or ensure rapid execution. 

There are two main types of orders:

• Buy orders: An investor instructs a broker to buy a security 

• Sell orders: The investor instructs the broker to sell a security 

Depending on the strategy and the current market conditions, the investor can select various order restrictions to control the execution of the order. An order restriction can, for example, specify that an order is only to be executed at a specific or better price, or that it is to be executed immediately, regardless of the current rate.

What are the order types on an exchange or with brokers?

Various order types are available on an exchange and from brokers, enabling individual trading strategies to be implemented precisely. Here are the most common order types:

• Market order

• Limit order

• Stop order

• Stop-limit order

• Trailing stop order

• OCO (One-Cancels-the-Other) order

• Iceberg order

• Day order

• GTC (Good-'til-Canceled) order

In order to provide a clear overview of when and why which order types make the most sense to use, we have broken down the individual order types according to their purpose and provided a simple explanation and summary:

Order types for fast execution on an exchange

This order type is designed to fulfil the order immediately, often without regard to the exact market price. The order type is particularly useful when speed is more important than price.

• Market order: A market order is executed immediately at the current market price. This order type is often used when the speed of execution is paramount over price. The advantage is that the order is guaranteed to be executed as long as there is a market for the security in question, which is particularly useful in the event of high volatility.

• Market-if-Touched (MIT) order: This order becomes a market order as soon as a certain target price is reached. This gives the investor an immediate reaction to market movements when the fixed price is reached. The MIT order is particularly useful when quick decisions are required in the event of sudden price movements.

Precise price control with order restrictions

Order types for precise price control determine the price at which a purchase or sale should take place. They offer investors the opportunity to determine the exact execution price. 

• Limit order: This order execution ensures that a purchase is only executed at a lower or specified price (buy limit order). A sale is only executed at higher or set price (sell limit order). This gives the investor more control over the execution price, especially if they want to buy or sell a security at a certain rate.

• Stop-limit order: This is a combination of the advantages of stop and limit orders. A buy stop-limit order is applied as soon as the rate reaches a certain level. However, execution only takes place if the price is within a specified order limit. With the sell stop-limit order the same applies to sales. This type of order offers the opportunity to minimise risk and simultaneously ensure precise price control.

Combined order types for complex trading strategies

Combined order types are aimed more at advanced investors who want to pursue several targets at the same time, or place larger orders discreetly. They offer more flexibility and control for complex trading strategies.

• OCO (One-Cancels-the-Other) order: This order type combines two linked orders. If one of the two orders is executed, the other is automatically cancelled. OCO orders are particularly advisable if investors want to set both a profit target and a loss limit in order to either take a profit or minimise losses without having to manage both orders manually.

• Bracket order: A bracket order combines a take-profit order with a stop-loss order. As soon as the main order is executed, both a profit target and a loss limit are automatically set. This is ideal for hedging a position, as the investor either closes with a profit or limits a loss.

• Iceberg order: This order execution only shows a small part of a large order in the order book. This prevents the market from being influenced by a large order movement. The iceberg order is very useful for large transactions in order to minimise price fluctuations.

Order types for risk minimisation and securing profit

These order types serve to protect against losses or to secure profits. They make it possible to automate trades and reduce risks without having to constantly monitor the market.

• Stop order (stop market order): A stop market order is activated when a certain rate is reached. A buy stop order buys when the rate rises above a specified value and is suitable for the start of a rising market. A sell stop order sells as soon as the rate falls below a certain value in order to limit losses.

• Take profit order: This order sells automatically when a predetermined profit is reached. It is ideal for securing profits without having to monitor the market constantly.

• Stop-loss order: In simple terms, this type of order involves the sale of a stock or security as soon as the rate falls below a certain level. This allows investors to limit losses and reduce the risk in the portfolio with the stop-loss order.

• Trailing stop order: This dynamic order follows the market price and adjusts the stop price accordingly. With a trailing stop buy order, the stop price rises with the market price and is triggered when the price falls. With a trailing stop sell order, the stop price is adjusted upwards in order to take profits, and the sale takes place as soon as the price falls again.

Time-limited order types for specific trading plans

A time-limited order type determines how long an order remains active. It will either be executed within this period or automatically cancelled. This execution offers flexibility to implement time-limited strategies.

• Day order: A day order only remains active until the end of the trading day. If the investor does not execute it by then, it expires automatically. This order type is suitable for short-term strategies in which the investor speculates on rapid rate movements.

• GTC (Good-'til-Canceled) order: The GTC order remains active until the investor either executes it or cancels it manually. This order has no fixed expiration date and is particularly useful for long-term positions where the investor is waiting for a certain rate development.

• Fill-or-kill (FOK) order: This order type must either be exercised immediately in full or cancelled completely. Partial executions are not possible with an FOK order, which makes it ideal when full and immediate order execution is required.

• Immediate-or-Cancel (IOC) order: Similar to the FOK order, but with the difference that an IOC order can be partially executed. The part that is not executed will be cancelled immediately. This can be particularly useful for investors who want to react quickly to market conditions but do not necessarily need complete execution.

Examples of the use of order types 

Investors use order types differently depending on the market environment and trading strategy. Here are some scenarios that show how order types can be used in a targeted manner:

Protection against losses with a stop-loss order

An investor has bought stocks in a company and wants to hedge their position in case the rate suddenly falls. To achieve this, they place a sell order with a stop-loss order as an order restriction. If the rate falls below a specified value, this automatically triggers the sell order to prevent larger losses. This allows investors to hold their position without constantly monitoring the market.

Targeted entry with a limit buy order

An investor wants to buy a stock but only at a certain rate that is below the current market price. They therefore place a buy order with a limit price. If the rate falls to or below this limit, the order is executed. In this case, the limit order ensures the investor does not enter the market at too high a price, and only when the desired price is reached.

Profit-taking with a take-profit order

After a sharp rise in rate, an investor plans to take profits before the rate falls again. Here, they place a sell order with a take-profit order. As soon as the rate reaches the previously defined target price, the order is executed, and the profit realised. This method makes it possible to secure profits automatically without constantly monitoring the market.

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Conclusion: Different order types for different trading strategies

Order types are an essential tool for successful trading on an exchange. Every trading strategy can benefit from the right order type and the right order restriction. Regardless of whether the aim is to achieve the best price with a buy order or to limit losses with a sell order – the right choice of order type is crucial. With flexible options such as limit and stop orders or advanced strategies such as trailing stop orders, investors can precisely control their trades and better adapt them to their objectives. Ultimately, the various order types offer numerous options for optimally implementing trading strategies.

Further topics relating to order types 

Want to know more about order types, cryptotrading and investment? Then take a look at the articles in our Bitpanda Academy here. Here you can not only deepen your knowledge of the various order types, but also access a wide range of guides and tutorials on topics such as blockchain networks, differentiating a portfolio and much more.