An entry order is like a special instruction traders give their brokers. It tells them to buy or sell a stock at a certain price later on. This price is decided by the trader, who studies the market and plans their trading strategy. The important thing about an entry order is that the trade happens only when the market price hits the set level.
Types of Entry Orders
There are two main kinds of entry orders:
- Limit Entry Order: This order is when you want to buy below the current market price or sell above it at a specific price. For example, if you think a stock will change direction after reaching a certain price, you can put in a limit entry order at that price.
- Stop Entry Order: With this order, you want to buy above the market price or sell below it at a particular price. Traders use this when they think the price will keep moving the same way after hitting a certain level.
Benefits of Entry Orders
- Automated Trading: Entry orders offer automated trading, a big plus. Once you set an entry order, the trade happens automatically when the price you’ve chosen is reached. This happens even if you’re not keeping an eye on the market.
- Risk Management: Entry orders are great for managing risk. By setting a definite price for a trade, you can limit potential losses if the market doesn’t go your way.
- Strategic Trading: With entry orders, traders can follow strategic trading plans. They can pick specific prices to enter trades based on their analysis of market conditions and where they think prices are headed in the future.
Drawbacks of Entry Orders
- No Guaranteed Execution: Entry orders only go through if the market hits the price you’ve set. If it doesn’t reach that level, the trade won’t happen.
- Slippage: Even though entry orders aim for a specific price, market conditions like rapid price changes can cause the actual execution price to differ. This gap between the expected and actual execution prices is called slippage.
- Requires Market Understanding: Using entry orders well demands a good grasp of market dynamics. Traders must accurately predict future price movements. Mistakes can result in missed opportunities or higher risk.