What order types does my broker need to support?
Posted by Paul Ridout on 22 May 2018 10:47 PM
For stocks, if your broker offers a 'demo' or paper trade account you can check out their order procedures and terminology there at no risk. They should also have an FAQ, and should be happy to guide you by email or phone.
It is very important that you get this right, as mistakes can be expensive.
Typically, for stock trades we use 3 order types, Stop/Limit; Limit, and Stop. The idea is that you do not have to hover over the market all the time.
Order to open is by a Stop/Limit order - If your stop price is touched, breached or traded through the order triggers. The Limit part (which can be the same price) will protect you against being gapped into a trade at an unfavourable price.
First Profit (P1) is taken by a Limit order - triggers when the price touches, breaches or trades through (at or better than) your limit price.
The Initial Stop Loss is a Stop order, and triggers when the price touches, breaches or trades through your Stop, closing the part of the position following P1, or the whole position if P1 is not taken.
When P1 has been taken, this Stop order than can be edited to become your Dynamic Trailing Stop, when the trade continues to move in your favour, providing 'windfall' profits until taken out.
You will need to check with your broker that they allow partial closures of positions (for the P1) and that they allow all those orders to be open on the same trade. This is usually achieved by placing the order to open, and then 'attaching' a 'Bracket Order' consisting of the P1 (Limit) and Initial Stop Loss to it, so the P1 and protection orders are conditional on the trade triggering in the first place. Thus, the opening order may be considered as the 'parent' order, and the brackets of Limit and Stop the 'child' orders.
Again, it is very important that you are thoroughly familiar with your chosen broker's procedures and terminology.