Understanding the different kinds of trading orders is one of the most essential steps to becoming a successful binary options trader.
As a binary options trader you have to predict future price movements. These price movements are the result of the relationship of supply and demand. To predict price movements, you therefore have to understand how supply and demand can be created, ergo which types of trading orders there are.
What is a trading order?
Trading orders are order types used by regular traders. In contrast to investments in binary options, these types of orders create supply and demand for an asset and thereby influence its price. Therefore, they are very important to binary options traders, too.
If you understand which types of trading orders there are, you can anticipate where they will appear in the market. You will find strategically relevant places where a specific type of trading order will appear in large numbers. When these orders get triggered, there will be a sudden increase in supply or demand, which will push prices strongly in one direction. You can use this strong movement to safely invest in a binary option and win a trade relatively easily.
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Which types of trading orders are there?
Over time, brokers and traders have invented several different forms of entering a market to make trading easier. These forms are:
1. The market order
The market order is the most basic type of order. With this type of order, traders will simply buy or sell an asset for the current market price.
Regular traders use market orders when they want their order to be executed immediately, for example to profit from a potentially strong movement such as a reaction to sudden news about an asset reaching the market. Since market orders are executed immediately they cannot be placed in advance and are therefore impossible to predict. This makes them less relevant to binary option traders.
2. The limit order
A limit order is not executed immediately. Instead, a trader can specify a minimum or maximum price he is willing to pay or accept.
A buy limit order is placed below the current market price and specifies the maximum price a trader is willing to pay for an asset. A sell limit order is placed over the current market price and specifies the minimum price a trader wants to get to sell an asset. When the market reaches the price specified by the limit order, the order becomes a market order and is executed immediately.
Limit orders are used to purchase or sell an asset near relevant chart formations of technical analysis, such as trend lines, or resistance and support levels. A trader can recognize the market formation and place his order in advance. As soon as the market reaches the price that completes a formation or breaks a trend line, the order is triggered and the trader can profit from his prediction automatically and with perfect timing.
3. Stop orders
A stop order is the opposite of a limit order. A buy stop is placed over the current price; a sell stop is placed below the current price. This means, with a stop order a trader specifies a price over the current market price at which he is willing to buy an asset or a price below the current market price at which he is willing to sell his position.
While this might seem counter-intuitive at first, it can make a lot of sense if you think about it from a standpoint of technical analysis. A trader invested in a long position can use a stop loss order to make sure his position is sold automatically if the market breaks through the trend line or a support level. Similarly, a trader looking to buy an asset if it breaks out of a continuation formation in a bullish trend could use a stop-order to get stopped into the market, once the breakout happens.
Therefore, stop orders are used to limit losses for long positions or to automatically open a new position once the market moves over a significant technical element. As with limit orders, once the market reaches the specified price, the stop order turns into a market order.