Order types: market, limit, stop
What you learn in 3 minutesA reader asked: 'If I want to buy USD/ZAR but I don't like the price right now, do I have to take it?' No. You choose how your order behaves. A market order takes the price on screen now. A limit order waits for a better price. A stop order triggers once price reaches a worse price, usually to limit a loss. The difference shows up in rand. On USD/ZAR near 18.4100, one pip on 0.10 lots is about R0.10, so a 20-pip gap between order prices is about R2.00 on that position size.
One entry idea, three order types, three prices
| Step | Amount | Note |
|---|---|---|
| The idea | Buy USD/ZAR | The same trade direction is used for all three orders. |
| Market order price | 18.4100 | The price quoted when the order is sent. |
| Limit order price | 18.4000 | A better price for a buyer, 100 pips below the market price. |
| Stop order price | 18.4200 | A worse price for a buyer, 100 pips above the market price. |
| Cost of the 100-pip difference on 0.10 lots | R10.00 | 100 pips x about R0.10 per pip on 0.10 lots. |
The broker may round the fill price, charge a spread or commission, and quote a different price if the market moves fast. These charges vary between brokers.
The mistake people make here
The common mistake is sending a market order when the plan was to wait for a better price. The order fills at whatever price is available, which may be worse than the price seen a second earlier. Another mistake is using a stop order to enter a trade when the intention was to buy lower. A stop triggers when price reaches a worse level, so it does the opposite of waiting. Decide the price first, then pick the order type that matches it.Check yourself
USD/ZAR is at 18.4100. You place a limit buy at 18.4000. Price falls to 18.4000 and your order fills. How many pips better is that than the market price, and what is that worth on 0.10 lots?
18.4100 minus 18.4000 is 100 pips. At about R0.10 per pip on 0.10 lots, 100 pips is about R10.00 better than buying at the market price.
You want to buy USD/ZAR but only if price rises above 18.4200 first. Which order type matches that, and what price does it trigger at?
A stop order. It triggers once price reaches 18.4200, which is 100 pips above the 18.4100 market price.