Exchange order: types and principle of operation

Pending orders help traders lock in profits and limit losses. Experts explained how best to use these tools and in what cases they should be abandoned

In cryptocurrency trading, the main tasks are to minimize losses and take profits. To do this, traders use special tools, which are commonly called pending orders. They can be divided into stop orders and limit orders. They allow you to make a transaction automatically when a situation arises in the market that suits the trader. This way, you don’t have to sit for hours at the monitor waiting for favorable conditions for a deal.

Investor's Dictionary

Order

- an order that an investor sends to a broker to buy or sell instruments on the exchange.

Opening a position

— the investor sends an order to buy an instrument. When the order is executed by the exchange, the position will be opened.

Lot

— the minimum number of company securities on the stock exchange available for purchase or sale. For example, Gazprom has one lot containing ten shares.

Exchange glass

(book of quotes, book of orders) - a list of limit orders on the market in the form of a table. Sell orders are located at the top, buy orders are located at the bottom.

Broker

- a company that acts as an intermediary between the exchange and the investor. The broker charges a commission for services.

Trend

— change in stock price in the form of a graph. The trend can rise, fall, or be in a narrow price channel.

Slippage

— execution of an order at a worse price than the investor requested when placing an order.

Market order

You can buy shares of a company if someone sells them on the stock exchange. Purchasing securities that are not in demand among investors takes longer - there are usually fewer offers for such financial instruments. The situation is different with securities of large companies, shares of the first echelon - transactions on them occur almost instantly. Thus, you can buy Gazprom shares immediately, but to buy shares of the Chelyabinsk Forging and Press Plant you will have to wait for an offer to sell.

A market order is an order to buy or sell immediately that an investor submits to a broker. Such an order indicates which paper and how many lots of it to buy or sell. A transaction using a market order is executed automatically at the best price at the time the order is executed.

You can place a market order for any instrument that is traded on the exchange during business hours.

Exchanges execute market orders fairly quickly, but there is usually a slight technical delay between the submission and execution of an order. If there are a large number of orders, the exchange servers process them sequentially - a technical delay of several seconds occurs.

Purchase of Gazprom shares at a price of ₽230.65 (dashed line) at the market price. This is the best price - the lowest purchase price offered by other investors. Source: Gazprombank Investments

Trading in shares of Russian and foreign companies on the Moscow Exchange and St. Petersburg Exchange takes place in the T+2 mode - delivery of securities occurs on the second business day from the date of the transaction. For example, if an investor purchased securities on Monday, he will receive them on Wednesday.

The amount required for the purchase must be in the brokerage account at the time the transaction is concluded, taking into account the brokerage commission - from 0.06% of the transaction amount. When purchasing securities at market prices, you must have a reserve in your account in the amount of 5% of the purchase amount. The broker reserves this money to guarantee the execution of the market order - the market price is constantly changing and may differ at a point in time from the price that the investor saw when placing a purchase order.

The investor sees some of the orders in the order book. At the bottom of the table there are orders to buy, at the top - to sell.

Depth of quotes with orders to buy (green lines) and sell (black lines). Source: Gazprombank Investments service

If you indicate in your application more lots than are being traded at the lowest price for purchase, then some of the lots will have to be purchased at a higher price.

Let’s say that in the order book there is an order to sell 100 shares at ₽100, and all the rest are already going for ₽101. If you place a market order for 101 shares, then one hundred shares will be purchased at the same price, and the one hundred and first will be purchased at a higher price.

Market orders are convenient to use when fast execution of an order is more important than obtaining the desired price.

Limit order

A limit order is an application to complete a transaction when the price specified by the investor is reached. A limit order is used for both buying and selling securities. A limit order is valid for one day - until the exchange closes. If the application is not executed, it will be withdrawn. You can send another application the next day.

Exchange prices are constantly changing. When an investor does not want to monitor quotes, he submits a limit order. Let’s say that company A’s shares are traded at a market price of 100 rubles, but an investor believes that the shares will fall in price and wants to buy them at a lower price - 99 rubles per share. If you don’t have time to monitor price changes during the day, a limit order will help. When the share price reaches 99 rubles, the purchase will occur automatically.

Switch to your price and set the asset purchase lot amount. As soon as one of the investors offers securities for this amount or lower, the deal will be concluded. Source: Gazprombank Investments service

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When buying, the investor specifies the limit order price below the market price; when selling, the price is higher. If this is not done, the order will be executed at the market price.

Time to place a limit order on the exchange. Source: Gazprombank Investments service

Limit orders allow you to buy and sell in the market with precise results and avoid the slippage that occurs with market orders. However, the price may not reach the limit order level and it will not be executed. Its use is appropriate if profit is more important than guaranteed execution of the transaction.

Validity

Surely you have already seen abbreviations like DAY, GTC, FOK, IOC, GTD, GAT. All of them limit the validity period of the application.

DAY . Orders of this type expire at the end of the trading day.
GTC (Good till canceled). The application is valid until it is explicitly cancelled. To ensure that such applications do not remain on the market indefinitely, an additional limit is introduced for them, usually from 30 to 90 days.
FOK (Fill Or Kill). The order must be executed in full or canceled immediately.
IOC (Immediate Or Cancel). The order is executed immediately or canceled by the exchange. Unlike FOK, they allow partial closure.
GTD (Good-til-Date/Time). The application is valid until the specified time.
GAT (Good-after-Time/Date). The application is valid from the specified time.

Stop market orders: stop loss and take profit

Another type of orders, the execution of which is postponed until specified conditions are met. There are two types of stop orders: stop loss and take profit.

Stop loss

used to limit possible losses. Suppose an investor purchased shares of company A at 100 rubles per share and hopes for growth, but the trend is downward and he loses money. To prevent this from happening, the investor places a stop loss. If you place a stop loss at 90 rubles, then if the market price drops to this level, the position will automatically be closed. Sometimes, when a stop loss is executed, slippage may occur and the transaction will be closed at the market price, but the loss will still be minimal.

After making a purchase, a stop order is placed below the purchase price, and when selling, it is placed above it. Setting a stop loss at 10 percent below the price at which the investor bought the stock would limit losses to 10 percent, and so on.

A short-term price fluctuation may trigger a stop order. Setting a stop loss at 10% for a stock that moves 20% in a week can trigger the stop loss. After which the price will continue to rise, but you will not be able to make money - the transaction will close with a loss.

Stop loss is a free insurance policy for an investor. Placing such an application does not require additional costs. The commission is charged only if the order is triggered. During exchange business hours, you can change the stop loss value in the application or close the stop order manually.

People tend to “fall in love” with their securities - “if I give the stock one more chance, it will definitely grow.” Setting a stop loss eliminates the influence of emotions in trading.

If an investor is on a buy and hold basis, stop losses will be of no use. In this case, shares are purchased for a long time with the expectation that the price will rise in a year or two. The trend does not grow linearly and corrections and price drops occur, but in long-term investing they are not taken into account.

Take profit will allow you to automatically lock in your profit. By submitting an application, the investor instructs the broker to close the position when a certain profit level is reached. Let’s say a trader bought shares for 100 rubles, but expects the asset to grow to 150 rubles and sets a take profit at this level. If the price reaches the level, the deal will automatically close, and the profit will be 50 rubles per share.

Take profit can be used in conjunction with stop loss. You don't have to watch every day whether stocks are rising or falling. This is convenient during vacation or in a situation where it is not possible to observe the market for a long time.

Stop orders will be implemented in the Gazprombank Investments application in 2022.

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Stop limit order

Stop-limit order is an order to place a limit order to buy or sell when the price reaches a specified level. The order algorithm resembles the joint operation of a limit and stop order. The order specifies two prices: a stop price and a limit price.

When the stock price reaches the stop order level, a limit order is opened. The asset will be purchased at the best price. If the price does not reach the stop level and reverses, the transaction will not take place.

A stop-limit order is convenient to use during sudden price movements when the risk of slippage is high.

What's the result?

The choice of order depends on the type of trading and goals. For day traders, the exact price obtained with a limit order can generate additional profits. When investing for a year or more, a market order is suitable. The combined use of stop loss and take profit is convenient when there is no time to monitor quotes or positions are open on dozens of instruments at the same time.

Using orders when opening and managing a position. Source: Gazprombank Investments service

Effective approach

By using a stop order, you can apply a break-even trading strategy, but for this you need to have a good understanding of the operation of trading terminals, Podolyan emphasizes. As an example, the expert cited a situation in which a trader bought Bitcoin at $50 thousand, and then the price of the digital coin reached $55 thousand. In this case, Podolyan recommends setting a “protective” stop order at $52 thousand in order to be guaranteed to make a profit and not go into negative territory, even if Bitcoin falls in price.

“I often use this method to protect my positions,” added the CEO of Cryptorg.exchange.

Discipline is very important in trading, and if you have opened a position, you should always use stop orders, recommends Vitaly Kirpichev.