Platform Insight Execution Order The different types

Execution Order – The different types

There are many types of orders in trading. Orders are instructions given by the trader to the broker to either buy or sell. Many combinations can be made depending on the trader’s strategy, but there are only two ways of executing those orders.

Although this is basic trading knowledge, some people confuse trading types of orders with order executions. If you don’t want to be one of those people who don’t know what they are talking about, keep reading because here we will explain the types of order executions.

What are the types of order executions?

Basically, there are two ways the broker can execute an order, and that is what orders executions are about, the way a broker executes an order. These two ways are Market execution and instant execution.

Both ways have their pros and cons. So let’s get to know each one of them so we can draw some conclusions about them.

Market Execution

When the trader orders a market execution, the broker sends the order at the market price when executing the transaction, and that’s the higher risk you take with this type of execution. By the time the transaction is made, the market price may not be the same as the one you saw when you made the order.

This is due to two factors:

  • This type of order prioritises the volume of transactions and not so much to the price. So, this way, it’s guaranteed that the trader will enter the trade but can’t guarantee the price at which he will enter.
  • The second factor is called slippage. In such a volatile market, prices sometimes change before the broker can complete the transaction, so the broker executes the order with the best price available.

Although this is not very common, and most trades are executed at the initial pip level or very close to it, every trader must be aware of the risk and benefits of the market execution.

For instance, imagine that a trader wants to buy the pair EUR/USD at 1.1497 because that’s the price he sees when he decides to make the trade. However, the volume of the market is $1000. He wants to enter quickly, so he makes a market order. Sadly, by the time he clicked, the broker was no longer available to make a trade for that amount at that price, so slippage occurred.

So, how does that happen? Well, without asking, the broker will find the closest price to the one he bid for until his order is filled up. For example, maybe the broker could trade $400 at the price the trader wanted: 1.1497. But the $600 remaining were traded in the following way:

$50 at 1.1499

$75 at 1.1501

$25 at 1.1507

$450 at 1.1513

This way, the maximum slippage was 16 pips which is a lot. And all that in a matter of seconds. Of course, in this scenario, the loss isn’t that big in terms of money, but when it comes to more unstable pairs and greater amounts of money, the difference can be huge.

Because you don’t know at which pip level you will finally buy or sell, you can’t set stop-loss or take profit orders.

Looking at the previous example, imagine that the trader wanted to set a stop-loss order at 1.1508. By that point, the broker would have traded $550. The next lowest price is 1.1513, so the broker has instructions to execute the order to complete the transaction. But after the point of 1.1508, the broker would also have instructions to sell, so a contradiction is created. The same thing happens in the case of selling and take profit orders. So no matter which combination is made, there is a risk of creating a contradiction.

Instant executions

This type of execution gives more control to the trader. It’s probably the preferred type of execution by beginners because it protects them from violent price changes.

This execution asks the trader at which price he wants to buy or sell and how big the slippage he is willing to accept.

Once these parameters are set, the broker tries to find the best possible price. Still, the difference with the market execution is that if the broker can’t execute a deal within the established parameters, the broker won’t decide to make the deal independently. Instead, it will present the best available options to the trader if he wants to trade.

This whole process can take up to 5 seconds which makes it a slower type of execution. Not all brokers offer instant execution. It’s more common among the market makers.

This type of execution does allow setting the take profit and stop-loss orders before the buy or sell action is completed. However, this is because the price is set before the position is opened. So, there is no chance of reaching any of these levels before the exchange is over.

Differences between both types of executions orders

Market executionInstant execution
The market execution orders are defined by the volume of the transaction.Instant executions orders are defined by price.
Doesn’t allows setting stop-loss nor take profit before the trade is made.Allows setting stop loss and take profit orders before the trade is made.
Fast executionsSlower executions
Risk of slippageProtects traders from market changes
Offered by all brokersOffered mostly by market makers
Guarantees entering the trade, whatever the price isEntering the market is not guaranteed

In Summary

Although there are many types of trading orders, the broker has only two ways of completing them: by market execution or instant execution. The difference between the two is the control the trader has over the transaction. While in the market execution, the trader is exposed to the risk of slippage. With instant order, the trader decides whether he wants to continue with the trade or not.

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