Order types in depth: limit, market, stop, stop-limit, iceberg

What you will learn

• How market and limit orders interact with the book, including marketable limit orders.
• How stop and stop-limit orders are triggered, and what happens in a price gap.
• How trailing stops, iceberg orders and time-in-force instructions work.
• How to choose an order type by weighing price risk against the risk of no fill.

Explanation

The basic order types were introduced in the course "Trading" (lesson "Brokers, order types and costs"). Here we look at what each order does inside the book.

Market and limit orders

A market order buys or sells immediately at the best available prices. It takes liquidity and walks through as many levels as needed: you control timing, not price.

A limit order sets a worst acceptable price. If the limit is behind the best opposite price, it rests in the book as a passive order and waits. If it reaches or crosses the opposite side, for example a buy limit at €20.04 when the best ask is €20.02, it is a marketable limit order: it trades at once at €20.02, €20.03 and €20.04, but never above €20.04. Any rest stays in the book at €20.04.

Stop orders

A stop order stays inactive until a stop price (trigger) is reached. A sell stop triggers when the price falls to or below the stop; a buy stop triggers when the price rises to or above it.

• Stop-market: after triggering, it becomes a market order. It will almost always fill, but the price can be far from the stop.
• Stop-limit: after triggering, it becomes a limit order at a stated limit. It never fills worse than the limit, but it may not fill at all.

Two practical details matter. First, which price triggers the stop: on an exchange it is usually the last traded price on that venue, while brokers and CFD providers may use the bid, the ask or their own quote. Second, whether the stop is held on the venue or on the broker's own system. Check both in your broker's order conditions.

Gaps

A gap is a jump in price with no trading in between, typically from one day's close to the next day's open. A sell stop at €38.00 that is jumped over is triggered at the first price below it, for example €36.50. Your planned risk is not your maximum loss.

Trailing stops

A trailing stop moves the stop price automatically behind the highest price reached (for a long position), by a fixed amount or percentage. It never moves back. After triggering it usually behaves like a stop-market order.

Iceberg orders

An iceberg order is a large limit order that shows only a small visible part, the peak. On Xetra, when a peak is fully executed and hidden volume remains, a new peak enters the book with a new timestamp, so it queues behind orders already waiting at that price. Venues set minimum sizes, so icebergs are mostly institutional; for you, visible size can understate real size.

Time-in-force

• Day: expires at the end of the trading day.
• Good-till-cancelled (GTC) or good-till-date (GTD): stays until cancelled or until a date; brokers often set a maximum period.
• Immediate-or-cancel (IOC): fill what is possible now, cancel the rest.
• Fill-or-kill (FOK): fill the whole order at once or cancel it completely.

Worked example

Hypothetical example: you hold 200 shares bought at €40.00. You want to limit the loss at €38.00. The share closes at €38.40, and bad news overnight makes it open at €36.50 and fall later to €34.00.

1. Planned risk: (€40.00 − €38.00) × 200 = €400.
2. Stop-market at €38.00: triggered at the open and filled near €36.50. Loss: (€40.00 − €36.50) × 200 = €700, 1.75 times the planned risk.
3. Stop-limit with stop €38.00 and limit €37.80: triggered at the open, but no buyer exists at €37.80 or higher. No fill. If you still hold at €34.00, the open loss is (€40.00 − €34.00) × 200 = €1,200.

Trailing stop: with a 5% trailing distance and a highest price of €44.00, the stop sits at €44.00 × 0.95 = €41.80.

Iceberg: 10,000 shares with a 1,000-share peak need 10 peaks; each of the nine refills joins the back of the queue. Exclusions: fees and taxes.

Common mistake

Practice activity

Hypothetical: you hold 300 shares bought at €25.00 with a sell stop-market at €23.50.

1. What is the planned risk? What is the loss if the share gaps down and the stop fills at €22.90?
2. You use a trailing stop of 8% instead. The highest price so far is €30.00, later €31.50. Where is the stop each time?
3. Which time-in-force fits a buy order of 2,000 shares that is only useful if completely filled right now?

Key takeaways

• A marketable limit order trades immediately but caps the price; it is safer than a plain market order.
• Stop-market orders give near-certain execution at an uncertain price; stop-limit orders give price control with a risk of no fill.
• Gaps can make the actual loss larger than the planned risk.
• Iceberg orders hide size, and time-in-force decides how long an order lives.

Next step

The next lesson shows how the venue matches these orders: price-time priority and auctions.