Modules for Beginners
Trading orders 101: Everything you need to know
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10 things to check when placing orders
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After going through plenty of concepts and looking at various different order types, we’ve finally reached the end of the road for this module. Considering the fact that this is the last chapter, we’ll stick with something that’s easy, yet essential, and just go over some of the key things that you need to take into account when placing orders.
Though this might sound similar to the sixth chapter of this module, it is quite different. In the sixth chapter, we focused on key numbers that you need to keep in mind, whereas in this one, we’ll be focusing on other key things. And with that, let’s begin the final leg of this module.
10 things to check when placing orders
Checking certain key things before placing an order is a great way to keep your trading organized. It will allow you to make good trading decisions and prepare you for any surprises that may come your way. That said, here are 10 of the most important things that you need to focus on.
1. Funds and leverage
Although this might sound obvious, it is one of the key things that many traders and investors miss out on. When you’re about to place an order, always take a moment out to check if you have the required funds available for smooth execution of the same. Getting stuck with insufficient funds right when you’re about to place an order can cause you to miss that golden trading opportunity.
Also, while you’re at it, check the amount of leverage that you’re going to have to carry before placing an order. This is especially important when you’re dealing with derivative contracts like futures and options. Placing an order without knowing the exact amount of leverage that you would be using can end up putting your entire investment under risk. And so, it is a good idea to check the leverage for a given order or trade before you actually put it in motion.
Since we’ve already dealt quite extensively with liquidity in the previous chapters of this module, we wouldn’t be going into too much detail here. All that you need to remember is to check for adequate liquidity when placing an order in a counter. Whether it is a stock, an index derivative, a commodity, or any other asset, always make sure that it has sufficient liquidity to get you in and out of the trade smoothly without any hassles.
One of the easiest ways to measure liquidity in a counter is to take a look at the total traded volume for the day. Alternatively, you could also check the market depth and the bid-ask spread as well.
Another major factor that you need to check when placing an order is the amount of volatility that’s in the stock or the index. Volatility basically determines just how much the price of an asset is likely to move. The higher the volatility for a stock, the more its price is likely to move.
Having sufficient volatility is really important if you’re interested in placing an intraday order. This way, you can ensure that you can exit your positions by the end of the trading session in a manner that’s favourable to you. Otherwise, you will have to forcefully exit your positions even if your stock’s price hasn’t moved by much, which can end up putting you under a loss.
4. Market trend
The current market trend is another important factor that you need to check when placing an order. In addition to determining the primary trend, you also need to be able to figure out the secondary and intraday trends as well. Why is this important, you ask?
Well, you wouldn’t want to enter into a short position during a bullish trend, or into a long position during a bearish trend now, would you? Only by checking the market trend before placing an order can you ensure that you follow the trend and not take a position that’s against it.
5. News, events, and latest developments
It is always a good idea to keep an eye on the latest developments and the news. This way, you get to gauge the market sentiment for the day. And this will allow you to take up positions accordingly. Before you go ahead and place an order, quickly scan for any scheduled economic news or other events that can influence the prices of stocks.
If you find any such event, news, or developments, it's best to let it pass before you place your order. This is simply because of the fact that stock volumes and volatility tend to be erratic just before an event or an announcement, which can end up working against your investment strategy.
6. Investment risk
Again, you’ve seen this multiple times before in the previous chapters of Smart Money. Investment risk is the risk of an investment working against your expectations. It is the probability of the returns from an investment not meeting the expected levels. This is not something to be taken lightly.
It is extremely crucial for you to always check the risk-reward ratio for every single order and trade that you’re about to place. The lower the risk-reward ratio the better, since it lowers the chances of you losing your investment capital if the trade doesn’t go in your favour.
Ideally, the risk-reward ratio should be at least 1:3. What this means is that for every trade, you risk losing 1/3rd of what you would be gaining if the trade goes in your favour. Anything higher than that, like 1:2 or 1:1, is extremely risky and often not worth the trade. On the other hand, anything lower than that (1:4, 1:5, and so on and so forth), is considered to be even more favourable.
7. Support and resistance levels
Another major factor to check when placing orders are the current support and resistance levels of the asset that you wish to buy or sell. Getting to know what these levels are will give you a good idea of what kind of an order you need to place in order to reach your profit target. That’s not all. It can help you determine your entry and exit points for your trade as well.
- For instance, if you see that an asset is near its resistance levels, you would be better off placing a short-sell order instead of a buy order. That’s because if the price hits the resistance, it will likely fall.
- Alternatively, if you see that an asset is near its support levels, you might do well placing a buy order instead of a short-sell order. That’s because if the price hits the support, it will likely rise.
8. Order details
Once you’ve checked all the other non-quantifiable items, you should then move towards checking the order-based details. Firstly, you should check whether you’ve selected the right order - buy or sell. You wouldn’t want to buy instead of selling or sell instead of buying, right? The next point of check should be the type of order - whether you intend the order to be a regular order, a stop-loss order, a bracket order, or a cover order.
Once you’ve done that, you need to also check if you’ve chosen the right order code - intraday (MIS) or Cash and Carry (CNC). This is really important, especially if you intend to take delivery of the shares that you’ve bought, since intraday orders get automatically squared off near the end of the trading session.
9. Order validity
Upon checking the above order details, the next item on your list should be the validity of the order. There are three validities for every buy or sell order:
- Immediate or Cancel (IOC)
- Good Till Cancelled (GTC)
For day validities, your orders would remain valid only till the end of the trading session. If your order doesn’t get executed by then, it would automatically get cancelled. On the other hand, if you choose IOC, your order would have to either get executed immediately or it would get cancelled automatically. And in the case of GTC, your orders would continue to remain valid through multiple days and trading sessions till it gets executed. Choosing the wrong type of order validity can put you under undue risk. That’s why it is critical to check the validity when placing an order.
10. Price type
You’ve already read about market orders and limit orders, right? Here’s a quick recap. When you choose the ‘Market’ price option, your order will immediately get executed at the current market price of the asset. However, if you choose the ‘Limit’ price option instead, you would be prompted to enter the price at which you wish your order to get executed.
And so, before you place an order, it is a good idea to quickly check if you’ve chosen the right price type. This will ensure that you don’t choose the market price option by mistake instead of the limit price option, or vice versa.
And with this, we’ve officially come to the end of this module. But don’t worry, we have some even more exciting things in store for you. Here’s a sneak peek. In the next module, we’re going to be taking a trip to the U.S.A to take a look at Wall Street and the American stock market. Excited? Keep reading to know more!
A quick recap
- When you’re about to place an order, always take a moment out to check if you have the required funds available for smooth execution of the same.
- Also, check the amount of leverage that you’re going to have to carry before placing an order.
- Liquidity and volatility are other things to keep in mind before you trade.
- Market trends, current news and other developments are also influential factors.
- It is also extremely crucial for you to always check the risk-reward ratio for every single order and trade that you’re about to place. The lower the risk-reward ratio the better.
- Another major factor to check when placing orders are the current support and resistance levels of the asset that you wish to buy or sell.
- Lastly, check the order details, order validity and the price type before you click the button.
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