How to Use Advanced Stock Order Types

August 28, 2023 Advanced
Advanced stock orders can provide additional flexibility for investors. Learn about a few advanced order types that can help traders execute trades more in line with their goals.

If you're an experienced trader, one whose strategies have grown toward the more sophisticated side of things, then your trade entries and exits might require a bit of extra nuance. In many cases, basic stock order types can still cover most trade execution needs for experienced traders. In some cases, though, stock orders might require some fine-tuning. Experienced traders can use advanced stock order types to execute nuanced trades more in line with their goals.

When using advanced order types, it's important to understand them in order to match them to the appropriate context and avoid errors that could be risky or costly. Additionally, some order types straddle the "basic" to "advanced" category, so it's a good idea to familiarize yourself with all of them to better understand when to use them and when not to use them.

Generally, advanced order types fall into two categories: conditional orders and durational orders. Conditional means an order is to be filled under specific conditions or the fill will trigger a condition. Durational means an order must take place within a specific time frame, or "time in force."

One-cancels-other order

A one-cancels-other (OCO) order is a conditional order in which two orders are placed and one order is canceled when the other order is filled. For example: A trader buys shares of a stock trading at $40. The profit target is 30%, and the trader doesn't want to lose more than 10% value in the position. An OCO order consisting of a sell limit ("take profit" order) at $52 and a sell stop at $36 can set the parameters of an automatic trade. In this case, if the stock's price reaches $52, the position will close out at a profit and the sell stop will immediately be canceled, removing the risk of inadvertently opening a short position should the stock decline to trade again at $36.

Bracket order

Available in most trading platforms designed for active traders, a bracket order immediately places an OCO "take profit" and a stop order once a position is opened.

If a trader enters a long position, a bracket order immediately places an OCO sell limit (take profit) and sell stop. On the other hand, if a trader enters a short position, a bracket order will place an OCO buy limit (take profit) and buy stop.

Stop-limit order

A stop-limit order allows traders to define a price range for execution, specifying the price at which an order should be triggered and the limit price at which the order should be executed. A stop-limit order essentially lets traders buy (sell) at price X but not any higher (lower) than price Y.

For example, a trader might be following a stock that's trading at $120. The trader wants to buy when the price reaches $125, but not if it exceeds $130. The stop-limit order creates the conditions of a buy stop at $125 and a buy limit at $130. As a result, the order can be triggered at the lower (specified) price while preventing any orders from being triggered beyond the set price limit. If the stock opens at a gap beyond $130, the order isn't filled until the price falls back to $130 or below. For short sale positions, a trader would do the reverse.

When using the thinkorswim® platform, it's possible to set up brackets with stop and stop-limit orders when placing the initial trade. Under the Trade tab, select a stock, and then select Buy custom (or Sell custom) from the menu (see below).

Bracket orders

Image illustrates how to bracket an order with profit and loss targets using a custom order.

Source: thinkorswim platform

For illustrative purposes only.

Good 'til canceled order

Good 'til canceled (GTC) is durational order that can be used to specify the time in force for other conditional order types. It directs the platform to keep the order active until the trader cancels it. Orders that haven't been filled by the end of the day are usually canceled once the market closes. But a trader can keep a buy order or sell order in place until it's filled or however long the broker will allow it to remain active (typically no more than 90 days) with a GTC order.

Understanding time in force

When placing a conditional order type that involves two or more orders, make sure the time in force (TIF) for each order is identical. For example, an OCO order might not be compatible with a GTC order if that order would be immediately canceled by the OCO.

It's also important to understand TIF in relation to day orders and GTC orders. A day order is canceled at the end of the day, while a GTC order remains active beyond the end of a trading day. Understanding TIF can help reduce the number of positions that counteract each other and that can inadvertently result in negative returns. On the thinkorswim platform, the TIF menu is located to the right of the order type.
 

Trailing stop order

Trailing stops are not "orders" per se but a means to automatically move or "trail" stops (basic stop orders) that are already in place. Think of the trailing stop as a kind of exit plan. For example, say a trader purchases stock, sets a stop, and then finds the entire position in the profit zone. The trader has a few choices for modifying the stop:

  • Leave it in place.
  • Move it up to a "break-even" level to reduce potential losses if the market moves against the trade.
  • Set the stop to "trail" a profitable position as it moves higher.

A trailing stop is designed to work as follows:

  • Set a trailing stop a specified distance below the current position.
  • If the position continues to move higher, the trailing stop also moves higher.
  • If the position declines to match the price of the trailing stop, the stop order is triggered, closing your position.

There are many ways to calculate the initial distance used to set a trailing stop. Using the thinkorswim platform, it's possible to pull up an order ticket and select the order type from the menu (see below). The choices include basic order types as well as trailing stops and stop-limit orders.

Order types

: Image shows how to select an order type using the thinkorswim platform. It illustrates how to choose an order type from the menu located to the right of the price.

Source: thinkorswim platform

For illustrative purposes only.

With a stop-limit order, a trader risks missing the market altogether. In a fast-moving market, it might be impossible to trigger the order at the stop price and then execute it at the stop-limit price or better, so a trader might not have the protection they sought. Stop orders and trailing stops will not guarantee an execution at or near the activation price. Once activated, a trailing stop competes with other incoming market orders. Additionally, a limit order doesn't guarantee execution because the position may never reach the set limit price.

Bottom line

Advanced order types can be useful tools for fine-tuning order entries and exits. However, it's important to know what each is designed to accomplish. Consider practicing first in a simulated environment like the paperMoney® stock market simulator on the thinkorswim platform.

Want to learn more about order types?

How a Risk Reversal Options Strategy Works

Having a risk reversal options strategy provides downside protection to the level of the purchased put option but limits the upside potential of a long stock position to the strike of the short call option. Here's how this strategy works.

The Pattern Day Trading Rule Explained

Watch to learn about the pattern day trading rule, what constitutes a day trade, and how to comply with the rule.

Options Spread Orders on thinkorswim® Desktop

Learn how to create options spread orders on thinkorswim® desktop.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

Short selling is an advanced trading strategy involving potentially unlimited risks, and must be done in a margin account. Margin trading increases your level of market risk. For more information, please refer to your account agreement and the Margin Risk Disclosure Statement.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness, or reliability cannot be guaranteed. 

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

0523-3FD0