Entries and Exits

In this post we will examine various entry and exit methods used in trading.

Types of Entry Orders

Stop Orders

A stop order is an order to buy or sell a security or script once the price of the security or script reaches a specified price, known as the stop price. When the specified price is reached, the stop order becomes a market order.
a stop order enters a market that is already moving in the direction of the trade. A buy or sell is triggered when the market rises above a buy stop, or falls below a sell stop order.

Importance: A stop order can confirm that the market is moving in a favourable direction at the time of entry. If a particular stop order entry happens to be a good one, movement will cause the trade to quickly become profitable.

A highly unpleasant situation can arise when the entry order gets past the stop and the market then begins to reverse! Because an order is entered on a stop, market entry occurs at a poor price.

Consider another case wherein prices begin to move rapidly in favour of a trade. Buying and selling in to such movement is like jumping on to a fast moving train and is likely to result in large amounts of slippage; the faster the move, the greater the slippage. Slippage is the difference between the price at which the stop is set and the price at which the order is actually filled. Slippage is plainly undesirable as it eats into the profit generated by a trade.

Limit Orders

A limit order is an order to buy or to sell at a specified, or better, price. For a buy limit order to be filled the market must move below the limit price; for a sell order, the market must move above the limit price.

Importance 

The advantage of a limit order is that there is no slippage, and entry takes at a favourable and known price.
Consider this; the market never trades below X-1 points and moves in the desired direction considerably, whereas your limit order to buy is a X points.

Market Orders

A market order is a simple order to buy or sell at the current market price.

Importance

Once placed, a market order is the fastest to get executed. Another advantage is guaranteed execution; after a market order has been placed, entry into the trade will definitely take place.

The problem with the market order is that of possible slippage. However, in contrast to a stop order, slippage can go either way – sometimes in the trade’s favour, sometimes against it, depending on the market movement.