It is a common misconception among beginners that day trading is quite simple. I mean, all you have to do is sit in front of a computer monitor, watch chart windows, push the buy button and you are done. Well, to be a successful day trader, you have to do more than just pushing buy and sell buttons. For starters, you have to formulate perfect entry and exit strategies. This will ensure that you are in and out of a trade having taken advantage of market discrepancies and profited from them.
That is not all. You still have to employ strategies that will prevent losses as a result of slippage. This is the same with mitigation of risks. You definitely don’t want to lose your capital during your first try. It is important to know that in a fast moving market, slippage is quite substantial.
To ensure success, there are order types you can use. This will help in minimizing risks associated with slippage assuring you of success.
The three top order types that day traders need to be familiar with include:
a. Limit order
b. Stop Order
c. Market Order
This is a day trading tool used by savvy investors to specify the price an investor is willing to part with. There are two types of limit orders – buy and sell. When it comes to a buy limit order, traders usually set it below the current market price. This indicates the highest price that the investor is willing to part with.
When it comes to a sell limit order, this is set over the current market price and helps to indicate the lowest price the investor is willing to accept. Savvy investors use the marketable limit order in cases where they don’t want to place a market order. This is done to prevent the chance of slippage from occurring.
As a result of using both types of limit orders, investors are able to maintain control over the prices.
A stop order is a powerful tool that protects you against losses. When implemented, it allows you as a day trader to get in and out of a trade safely. The tool is able to execute your order once the price hits your stop price. That is why it is used to protect long or short positions.
What you need to know is that a buy stop order is usually made at a stop price that is above the current market price. This is done to limit a loss or protect profits for a security an investor has sold short. In a sell stop order, the investor will place a stop price that is below the current market price. This is done to limit losses or protect profits for stocks that the trader own.
According to the SEC, a market order refers to an order to buy or sell a security at the best available price. One thing day traders need to note with the market order is that it is usually executed very quickly. However, the price at which the market order has been set is not guaranteed to execute. In fast moving markets, it is common for the price at which market orders execute to shift from the real time quote.
Just like stop and limit orders, the market order is usually set to allow the day trader to get in and out of a trade very quickly. It is important to note that you may run into problems when trading with larger sizes. This is because it can result in a bad a slippage and you don’t want this to happen.
To ensure success, it’s wise to pay attention to the spread and size at each price level. Your main concern should be attaining the best price to maximize profits.
The best thing about modern trading platforms is that they enable both beginners and experienced traders to use a number of order types. This helps to add precision and protection to trading strategies. While understanding when to enter a trade is great, it is also important to know when to exit. Taking too long in a trade could result in slippage. To avoid this, implement limit, stop and market order types with professionalism.