CFD orders explained: Market, limit, and stop orders
Reading time: 7 minutes
Every trade begins with an order. Whether you buy or sell Contracts for Difference (CFDs), the type of order you select influences the price you enter, the manner of trade execution, and how much control you have over the risk. If you wish to become a more confident trader, knowing the differences between market, limit, and stop orders would be an important part of your trading toolkit.
What is a CFD order?
Think of a CFD order as an instruction you issue to a broker or a trading platform either to buy or sell a CFD. In this setup, you don’t own the underlying asset, you are trading on its price movements. It’s worth mentioning that CFDs are accessible across a wide range of financial markets like forex, shares, commodities, and cryptocurrencies.
When you place an order, you are essentially choosing which market to trade and how the trade will be executed. Here’s where the different order types come in: some traders enter the market immediately, while others prefer to wait until the price reaches a certain level. In some cases, traders only participate if the market breaks through a key support or resistance level. The different order types make such styles and approaches possible.
Market orders
Let’s begin with the first order type – market orders. A market order is an instruction to buy or sell a CFD at the best available price. If your goal is to execute a trade immediately, a market order may be suitable. It may facilitate the order execution but does not ensure a specific price.
For example, a stock’s quote includes the highest bid potential buyers are ready to purchase to acquire that stock, the lowest offer potential sellers are willing to accept to sell that stock, and the last price at which the stock traded. For less-liquid stocks, the last price may not be updated, as that can change if the last trade transpired hours or minutes prior. It’s the same scenario for fast-moving markets, when stock prices can change abruptly or within a short span of time. When you’re placing a market order, it’s more important to consider the current bid and offer prices more than the last trade price.
Market orders also work best in already open markets. If you happen to place a market order when markets are closed, it will be executed at the next market open, which could mean lower or higher from its prior close.
A stock market’s price can change for different reasons in between market sessions such as release of earnings, company news or economic data, or any news that can affect sectors or the entire industry.
Limit orders
If market orders are placed at the asset’s best available price, a limit order buys or sells, for example, a stock based on the buy limit (which is the maximum price to be paid) or the sell limit (which is the minimum price to be received). Also, unlike market orders, there is no assurance of execution in limit orders. If the order is filled, it can only happen at your specified limit price or better.
- You can buy the stock at a price lower than the current quote
- You can sell the stock at a price higher than the current quote
Even if the stock reaches a specified limit price, it’s possible that the order may not fill because there are orders ahead of yours, which means there aren’t enough additional sellers or buyers willing to sell or buy at the limit price you had set.
How long does a limit order remain active?
The length of time a limit order remains active depends on the order duration selected and the broker or trading platform you use. Common options include:
- Day: The order remains active for the current trading session. If it is not filled before the session ends, it expires.
- Good Till Cancelled (GTC): The order remains active until it is executed or cancelled, subject to the maximum duration set by the broker or trading platform.
- Extended Hours: Where available, the order can remain active during designated pre-market or after-hours trading sessions. The available sessions and trading hours vary by broker, platform and market.
- GTC + Extended Hours: Where supported, the order remains active for its specified GTC period and can also be eligible for execution during designated extended trading sessions.
Before placing a limit order, check your broker's available order durations and trading hours, as these can vary depending on the instrument and platform.
Stop orders
Central to a stop order is the concept of a stop price. A stop order is triggered when the market reaches or moves through a specified price level. For a standard stop-market order, once the stop price is reached, the order becomes a market order and is executed at the next available price.
The execution price may differ from the stop price, particularly when the market is moving quickly or there is limited liquidity. This difference is known as slippage, and it means a stop order does not guarantee execution at the specified stop price.
Traders commonly use stop-loss orders to help manage potential losses or protect profits if the market moves against their position. A sell stop can be used to exit a long position if the price falls to a specified level. Conversely, a buy stop can be used to enter a long position if the price rises to a specified level, such as when trading a potential breakout. Buy stops can also be used to close short positions.
It's important to note that a stop order does not guarantee a specific execution price, particularly during periods of high volatility or when the market gaps between prices.
Start trading CFDs with FP Markets
As you gain experience, you may find yourself using all three order types — market, limit, and stop orders — all of which have a valuable place in CFD trading. There is no superior order type: the choice depends on your strategy, outlook on the market, and the level of control you want to exercise in every trade execution.
But whether you are placing your first CFD trade or refining your trade strategy, having access to a reliable trading platform like FP Markets can make a big difference. Open a live account with us today to explore different order types, practise your strategy, and grow your confidence in the global financial markets.
Frequently asked questions (FAQs)
A CFD order is an instruction to buy or sell a Contract for Difference through a trading platform. It determines how and when your trade is executed based on the order type you choose.
A market order executes immediately at the best available price. A limit order executes only at your chosen price or better, while a stop order becomes a market order once the market reaches a specified trigger price.
There is no single best order type. Market orders are generally the simplest to use, while limit and stop orders offer greater control over entry, exit and risk management as you gain more trading experience.
