Order types: market, limit, stop
What you learn in 3 minutesThis lesson explains the three order types a beginner meets on any platform, and what each one does to the price you actually get. The word 'order' is simply an instruction to the broker: buy or sell this instrument, in this size, under these conditions. The condition is the part that changes, and it changes the price. On AUD/USD at 0.6640, one pip on one standard lot is 10 units of the quote currency, which converts to about A$15 at that rate. So a difference of a few pips between order types is a real difference in dollars.
One idea, three orders, three prices
| Step | Amount | Note |
|---|---|---|
| Idea | Buy AUD/USD | the same decision in all three cases |
| Market order price | 0.6640 | the price showing when the order is sent |
| Limit order price | 0.6620 | 20 pips below the market, waiting for a better buy price |
| Stop order trigger | 0.6660 | 20 pips above the market, triggered once price reaches it |
| Pip value, one standard lot | A$15 | 10 quote units per pip, converted at about 0.6640 |
| Gap between market and limit | 20 pips = A$300 | 20 x A$15 on one standard lot |
| Gap between market and stop trigger | 20 pips = A$300 | 20 x A$15 on one standard lot |
The fill price may differ from the trigger or requested price. Brokers vary in how they round prices, whether they add commission or spread on top, and how they handle gaps, so the final figure on a statement can differ from the figures above.
The mistake people make here
The common mistake is to treat a stop order as a limit order. A limit waits for a better price and may never fill. A stop waits for a worse price and is designed to trigger once the market reaches it, which is why it is used to exit or to enter on a break. People also assume the trigger price is the fill price. In fast markets the fill can be several pips away, and on one standard lot each pip is about A$15, so a five pip slip is roughly A$75. Check the order ticket before sending it, and check the statement after.Check yourself
AUD/USD is at 0.6640. A limit buy is placed 15 pips below. What is the limit price, and what is 15 pips worth on one standard lot in A$?
0.6640 minus 0.0015 = 0.6625. 15 pips x A$15 = A$225.
A stop buy triggers at 0.6660 and fills at 0.6665. How many pips away from the trigger is the fill, and what is that in A$ on one standard lot?
0.6665 minus 0.6660 = 0.0005, which is 5 pips. 5 x A$15 = A$75.
Why can a limit order stay unfilled while a stop order almost always triggers once its level is reached?
A limit sits at a better price and only fills if the market comes to it. A stop sits at a worse price and triggers when the market reaches it, so it becomes a market order at that point.