Before going out and trading CFDs, it’s important to understand the order types used to open and close positions. There are 3 primary order types: market, limit and stop orders; and 2 advanced (but regularly used) order types: OCO and trailing stop orders. This page will cover all 5 of these order types and how they can be used in your CFD trading account.
Primary Order Types
The most common and easy-to-understand order type is the market order. When a market order is placed to buy or sell a product, it will immediately be filled on our trade at the best available price. It guarantees trade execution, but does not guarantee the price at which we will be filled; prices could be better or worse than the price intended since a market order is subject to the market’s best available price at that moment in time.
Market orders can be used to open a new position or to close an existing position in your CFD account in as short of time as possible. Accordingly, if silver was currently trading at $16/ounce and we were willing to purchase silver at that price, we could place a market order to buy immediately. Then later on, when silver moved up to $17/ounce and we were willing to sell our silver at that price, we could place a market order to sell immediately.
A stop order is a pending order that will act as a market order when our selected price is hit or surpassed. It’s important to set stop orders at a price level that is worse than the current market price or it will immediately execute. This means setting a stop order to sell at a price below market or setting it to buy above market.
Stop orders are mostly used to close out a losing position and ‘stop’ ones losses. If you bought oil at $90/barrel for example, you could set a stop order to sell if it falls to $80/barrel. So your risk would be approximately $10/barrel on your position. It is correct to say approximately because stop orders cannot guarantee ones executed price. They can only guarantee that they will get you out of your position when your stop order is triggered.
Advanced Order Types
An OCO or “one cancels the other” order allows traders to create two pending orders that are linked together. Whichever order is hit first, opens a position, the other order is then canceled.
The pending orders inside our OCO order can be stop orders, limit orders, or one of each depending on what you are looking to accomplish. Traders commonly use OCOs to trade a CFD that might be breaking out of a trading range. You can set a stop order to buy above the current range and a stop order to sell below the current range so no matter what direction price breaks, one of our stop orders in our OCO will open a trade in the direction of the break (the other stop order is then automatically canceled).
What is an If Done Order?
‘If done’ orders are a type of order than can be used when trading CFDs. These orders allow traders to set an open order level, which can be a limit or stop order. A stop loss and take profit limit order is automatically placed if the trade is initiated. An ‘if done’ order is also known as a contingent order as it relates two CFD orders together.
Similar to One Cancels the Other orders, the ‘if done’ order differs as instead of one order cancelling the other, one order means the second order is entered into. This order would be inactive until the initial open order level is filled. Once this happens, the second order, i.e. the stop loss and take profit levels, is subsequently entered into.
The order can be thought of two separate orders, with the second order conditional on the first order being filled. This allows the trade to plan trades and enter them without watching and tracking the market very frequently. It is useful as the trade is executed from start to finish; it allows more opportunities and the ability to trade potential entry prices when the trader is not actively trading.
Let’s consider an ‘If Done Order’ Example To illustrate if done orders, suppose you want to buy a share CFD when the price hits £13, when at present it is £13.50. You think it will bounce upwards from £13, but are willing to risk a downward move to £12. You think the price will head to £15 once it bounces up from £13. You can decide on the market prices for exit and entry, in this case £15/£12 and £13 respectively. Once the market price hit £13, the first order is entered and simultaneously the stop loss and take profit levels are entered, i.e. the limit orders. Suppose the trade goes to plan and the price rises to £15. Then the sell order that is made automatically after the initial order is executed and the trader will have made a profit without having to keep track of price action and technical indicators.
Trailing Stop Order
Trailing stop orders have the same attributes as traditional stop orders, but they have the ability to move as price moves in our favor for our trade. So if we bought Oil at $90/barrel and set a trailing stop order at $80/barrel, we would still be closed out of our trade if Oil reached $80. If instead, price started to move in our favor, our stop order would move higher and never be more than $10 away from the market price.
If Oil moved up $5 to $95/barrel, our trailing stop would also move $5 higher, up to $85. Trailing stops can reduce the amount of risk we are taking on a trade and can even begin to lock in profits if price moves far enough in our favor to cause our stop to move above our entry price. Trailing stops will only move in our favor, and will not move to a worse price if a position moves against us.
Note: Now that we know how to use the most common order types, we can confidently execute our trading strategy the way we want it to be executed. Be sure to check out our other CFD trading articles to further improve your knowledge in the market.