Modules for Beginners
Trading orders 101: Everything you need to know
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Important numbers to keep in mind when placing orders
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In the previous chapter of this module we saw the different types of orders that you can place on the stock market. However, before you go around placing orders in trading, it is essential for you to take certain numbers into account. And that’s exactly what we’re going to be focusing on in this chapter. So, let’s get started.
The key numbers that you should keep in mind when placing orders in trading
When you log into your trading portal to place an order, you would typically get to see a bunch of different numbers. Now, these numbers are quite important and should definitely be taken into account before you actually place an order since they can influence your trade immensely.
1. The price
This is arguably the most important number that you need to keep in mind when placing an order. The price that you choose for your trade is the price at which your order is to be executed. This is ultimately going to be the factor that would decide whether you make a profit or a loss. That’s not all. It even has the power to influence the execution of your trade.
For instance, for a buy order, if you choose a price that’s too low in comparison with the current market price, chances are that your order would remain unexecuted. Similarly, for a sell order, if you choose a price that’s too high, your order might again remain unexecuted. And so, finding the right middle ground while also taking your expected profit target into consideration is of utmost importance when placing orders in trading.
2. The quantity
While not as crucial as the price, the quantity that you wish to trade also occupies an important role during order placement. The number that you enter in this field would ultimately decide just how many equity shares or lots of derivatives you would buy or sell. Here’s a quick pointer for you.
In the case of a buy order, the quantity that you wish to trade in should always be based on the price and your investment budget for that trade. It should not be the other way around. This way, you would not have to compromise on either the price at which you trade, or on your investment budget, both of which can leave you at risk.
3. The trigger price
You’ve already read extensively about stop loss orders and their importance in the previous chapters of this module, right? The trigger price is a number that’s closely related to a stop loss order. Now, when you place a stop loss order, your stock broker will mandatorily require you to enter a trigger price in addition to the price at which you wish to sell your asset.
Only when the asset’s price crosses the trigger price, your stock broker activates your stop loss order. Until the asset’s price crosses the trigger price, your stock broker keeps your stop loss order on hold.
Here’s an example that can help you better understand this concept.
Assume that you’ve bought a share of ICICI Bank at Rs. 600. You wish to protect your investment capital in the event of a downfall by placing a stop loss sell order. In the stop loss order section, you’re asked to enter the trigger price and the order price. You set the trigger price at Rs. 580 and the stop loss order price at Rs. 570.
Now, assume the stock price tumbles downward. If the stock price goes below your trigger price of Rs. 580, your broker will automatically activate the stop loss order that you placed at a price of Rs. 570. Alternatively, if the stock price doesn’t touch Rs. 580, your stop loss order would continue to remain on hold.
4. The disclosed quantity
This is another very important number that you need to keep in mind, especially when you’re trading in bulk. The disclosed quantity is a field that allows you to display only a part of your total buy or sell quantity to the public. This is very useful for times when you’re planning to buy or sell large quantities of shares since it can help minimize abnormal price movements.
Here’s an example. Assume that you wish to purchase 2,000 shares of Hindustan Unilever. Now, when you normally place a buy order for this quantity, it would immediately show up in the market under the bids section. Since you’re willing to buy such a large amount of shares, the other investors may be spurred to drive the price up, which makes it harder for you to get the shares at the price that you want.
Let’s say that you don’t want that to happen. And so, you use the disclosed quantity function. In addition to entering 2,000 under the quantity field as usual, you also enter 200 under the disclosed quantity field. Now, under the bids section of the market depth, your single order for 2,000 shares would appear as 10 orders of 200 each to the other investors. This will prevent them from jacking the prices up, since they wouldn’t even know that such a large order exists.
5. The volume of shares traded
As we’ve already seen before, in the third chapter of this module, the volume of shares traded for a stock gives you some really good insights on the amount of liquidity present in the counter. The more number of shares traded, the higher the liquidity.
And so, it is always a good idea to check just how many shares have been traded before you place an order. This is especially important when placing buy orders, since you might end up getting stuck in a stock with low liquidity. That said, here’s something that you should know. The volume is not constant and keeps changing as the trading session progresses. The only time volume is constant is when the trading day comes to a close.
6. The last traded price
As discussed in one of the previous chapters, the last traded price (LTP) is the price at which the most recent trade in an asset was executed. Just like the volume, the LTP also keeps changing with every executed trade.
That said, the only time LTP also remains constant is when the trading session ends. At that point, the LTP refers to the price at which the last trade was executed on that day. You can use the LTP to determine the price at which you wish to place a buy order or a sell order.
7. The previous close and today’s open prices
The previous close is nothing but the closing price of an asset on the previous trading day. Contrary to popular opinion, the LTP and the closing price are not the same for an asset at the end of a trading session. We saw this in the chapter on the LTP. The closing price is basically a volume weighted average of the trades that happened during the last half-hour of a trading session (3.00 PM to 3.30 PM).
On the other hand, the open price of an asset is the price at which the first trade of the day gets executed. Reading both of these prices together can give you some really good insights into the price movement of an asset and can even allow you to somewhat predict the day’s trend.
For instance, if the price of a stock closes at Rs. 102 on one trading day, and opens at Rs. 120 on the next trading day, it means there’s a gap up opening for an asset. This implies that there’s a slight chance for the asset to turn bullish for the day. Alternatively, if there’s a gap down opening, there’s again a slight chance for the asset to turn bearish during the day.
8. The low and high prices
Just like the closing and opening prices, the low and high prices of an asset are also equally important. The low price depicts the lowest price that an asset has touched during a trading session, whereas the high price depicts the highest price that the asset has tested during the session.
These two numbers, along with the LTP, can give you a good idea of the likely price movement of an asset. For instance, placing a buy order when the LTP of a stock is nearabout its low price for the day is viewed as a risky decision simply because there’s a chance for the stock to continue its decline even further.
9. The margin required
This is one number that you really need to keep in mind when trading in derivative contracts such as futures and options. As you’ve already seen quite extensively in the past chapters and modules of Smart Money, dealing in derivatives require you to deposit a margin with your stock broker.
Knowing the exact margin that you need to put up for a derivative trade is extremely essential when placing an order. While some trading platforms display the amount of margin required to execute the trade in the order window itself, others don’t. In that case, you would have to use a margin calculator to manually arrive at the figure.
10. Profit target
We’ve dealt with this number too, time and time again. It is never a good idea to get into a trade without a proper profit target in mind. You always need to set a profit target first before getting into a trade since both your entry and exit points are ultimately determined with respect to your profit target. This makes the profit target another hugely crucial number to take into account when placing orders.
Other important things to keep in mind
In addition to the 10 numbers that we saw above, there are a couple more that you need to account for. Let’s take a quick look at them.
1. The market depth
The market depth is basically the extent of bids and asks for a particular asset. For instance, when you add a stock to the watchlist in your trading portal, you also get the ability to view the top 5 bids and top 5 offers for that particular asset. This gives you some insight into the market depth and the price of an asset.
2. The price bands
The price bands are essentially the lower circuit and upper circuit prices of a particular asset. These values are set by the exchange at the start of every single trading day, and the stock is allowed to be traded only within this price range. The lower circuit is the lowest price at which a stock is allowed to trade in a day, whereas the upper circuit is the highest price at which a stock is permitted to trade in a day.
Still not clear about market depth and price bands? Don’t worry, because we will be dealing with these two important numbers quite extensively in the next chapter of this module. So, head to the following chapter to understand what these two concepts are.
A quick recap
- The price that you choose for your trade is the price at which your order is to be executed. It is arguably the most important number that you need to keep in mind when placing an order.
- The quantity that you wish to trade also occupies an important role during order placement. The number that you enter in this field would ultimately decide just how many equity shares or lots of derivatives you would buy or sell.
- The trigger price is another number that you need to account for. It’s closely related to a stop loss order.
- The disclosed quantity is a field that allows you to display only a part of your total buy or sell quantity to the public. This is very useful for times when you’re planning to buy or sell large quantities of shares since it can help minimize abnormal price movements.
- The volume of shares traded for a stock gives you some really good insights on the amount of liquidity present in the counter. The more number of shares traded, the higher the liquidity.
- The previous close is nothing but the closing price of an asset on the previous trading day. The open price of an asset is the price at which the first trade of the day gets executed. Reading both of these prices together can give you some really good insights into the price movement of an asset and can even allow you to somewhat predict the day’s trend.
- Just like the closing and opening prices, the low and high prices of an asset are also equally important. The low price depicts the lowest price that an asset has touched during a trading session, whereas the high price depicts the highest price that the asset has tested during the session.
- The profit target and the margin required are also important numbers to keep in mind.
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