Understanding Contract For Difference Order Types
There are many different Contract for difference order varieties, the vast majority of which are hybrid varieties of the two main order types market and limit. A market order is simply an order that will trigger the buying or selling of a Contract for difference at the current market price. A limit order is an order which lets you specify the buy price or sell price of a Contract for difference. In the case of a buy limit order the price would be below the current market price and in the case of a sell limit order the purchase price would be above the current market price.
Limit Orders
Limit orders are used to enter or exit positions. To illustrate, in order to enter a long CFD position, you can use a limit order to buy the CFD if the price trades at an exact price or lower. Normally limit orders can only be placed in the times specified by the exchange on which the instrument the Contract for difference is based on is listed. There are however some CFD providers which may allow you to place limit buy orders outside the hours specified by the exchanges, these CFD providers will hold your order off-market and place the order automatically when permitted to do so by the exchange. Which means you will be able to get into the market the next day if the CFD trades at or below the price of your order.
In some other cases, it is possible to exit a long CFD position with a limit order to sell. Assume that the price of the CFD is $1.25 and you are in the market to buy. You set a limit sell order at your profit target that is $1.75. If the price rises to or exceeds the $1.75 mark, your CFD position will be closed at your profit target.
Stop Orders
Orders which are used to buy CFDs when the price trades at or above a limit price are know as CFD stop orders, orders which you use to sell the CFDs during a time when the price trades at or below the limit price are also known stop orders. The same as limit orders, stop orders can be utilized to enter or exit a position. If a trade goes against you, stop orders are usually used called “stop loss” orders and are used to exit a position. For instance, assume that you have bought CFDs at a price of $1.50 and the stop loss order is set at $1.25. If the price of the CFDs falls to or below $1.25, you will sell the CFDs and will exit the position. You can use stop orders for taking profits on trades also, lets assume that in the example above you set your stop order at $1.75. If the price of the CFDs rise to $1.75, you’ll sell the CFDs and exit the position, stop orders utilised in this way are generally known as “take profit” orders.
Stop orders can be utilized not just for exiting positions but also for getting into new positions. By way of example, let’s say the present price of a CFD is $1.50 and you placed a stop buy order at $1.80. Your position will be opened if the price rises up to and above $1.80. Similar logic applies should you wish to short sell the CFD at a price below the price at which it’s currently trading. Using the example above if you wished to open a short position when the price falls to $1.30 you would place your stop sell order at $1.30. Should the price fall to $1.30 your short position will be opened.
If Done Orders
“If done” orders are a specific style of order that allow traders to activate an order only after another order is filled. To illustrate, in the event you place a limit order to enter a CFD position but do not want the stop loss order to be activated until the position is opened you would use an “if done” order. Using “if done” orders will let you set a limit order to enter a CFD at a target price and set your stop loss or take profit order to be placed before your limit order is even filled. Using “if-done” orders means that you will not need to continually monitor your portfolio to check whether your limit order is filled.
Order Execution
Not all CFD providers execute orders in exactly the same way. Some providers may require that before your stop loss is filled a sufficient amount of underlying stock is traded at the price of your stop loss order. On the other hand, some providers might require only that the underlying stock was traded at the price to in order for your order to be filled.
You’re able to learn more about Contracts for Difference, and how they work by downloading our free CFD education. Remember, before you start using some of the more difficult order types mentioned above you must understand how they work and whether they suit your CFD trading trading strategy.
