Until now we have only been using market orders to enter trades. And while market orders may be the most common order type, you might want to use stop orders and limit orders for some of your trading strategies.
A stop order is an order to buy or sell once the market exceeds or reaches the stop price. Once the stop price is reached, it simply turns to a market order.
For example, you may set a buy stop order at $100 which means that it will turn into a market order when the market reaches $100. Similarly, you may place a sell stop order at $80, which will be turned into a market order once price gets to $80 or below.
A limit order is an order that will only be executed at the limit price or better. In other words, a sell limit order will be executed at the limit price or higher, while a buy limit order will be executed at the limit price or lower.
While limit orders will eliminate slippage, there is a chance that your order won’t be filled if there are no matching orders on the other side. With a stop order, your order will be executed regardless of the price, meaning that you may experience quite a lot of slippage in illiquid markets that move fast.
While this may seem like a disadvantage at first, it holds the significant benefit that you’ll always be filled and won’t miss out on any trades.
Since Easylanguage only evaluates conditions on the close of the bar, it means that it it cannot act quickly in response to rapid changes or breakouts over certain levels.
For instance, if you’re watching a price level and want to go long if the market breaks that level, it may be that you get in far above the breakout level, since that’s when Easylanguage closed the bar and was able to send out the corresponding buy order.
By using a stop order or limit order we don’t have these issues. This is because a stop order, while being issued on the close of the bar just like a market order, will persist during the whole coming bar and catch any breakouts or breakdowns above or below the stop/limit level.
In the coming two lessons we’ll have a look at how to use limit orders and stop orders in Easylanguage