Conditional order

A conditional order is a type of trading instruction that is executed only if certain predetermined conditions are met. These conditions typically relate to the price or volume of a security and are specified by the investor when placing the order.
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Updated on Jun 6, 2024
Reading time 4 minutes

3 key takeaways

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  • Conditional orders are trading instructions that are executed automatically when specific conditions are met, such as a target price or volume threshold.
  • These orders help traders implement precise entry and exit strategies, manage risk, and seize trading opportunities in volatile markets.
  • Common types of conditional orders include stop orders, limit orders, and market-if-touched orders, each serving different purposes in trading strategies.

What is a Conditional Order?

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A conditional order is a trading instruction that is contingent upon the fulfillment of predetermined conditions. These conditions are set by the trader and typically relate to the price, volume, or timing of a security. When the specified conditions are met, the order is automatically executed by the brokerage platform, without the need for manual intervention by the trader. Conditional orders allow investors to implement precise trading strategies, manage risk, and capitalize on market movements with precision and efficiency.

Importance of Conditional Orders

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  • Automated Trading: Conditional orders automate trading decisions based on predefined criteria, allowing traders to execute their strategies efficiently and without constant monitoring of the market.
  • Risk Management: These orders help traders manage risk by setting stop-loss orders to limit potential losses or profit-taking orders to lock in gains when specific price targets are reached.
  • Market Opportunities: Conditional orders enable traders to capitalize on market opportunities, such as breakouts, trend reversals, or price fluctuations, by automatically entering or exiting positions at optimal price levels.

How Conditional Orders Work

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Types of Conditional Orders

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  • Stop Orders: These orders are triggered when the market price reaches a specified level, known as the stop price. They are commonly used to limit losses or initiate new positions.
  • Limit Orders: Limit orders are executed at a specified price or better. They allow traders to set precise entry or exit points and control the price at which their orders are filled.
  • Market-if-Touched Orders (MIT): MIT orders are executed at the market price when a specified price level is touched. They are used to enter or exit positions quickly in response to price movements.

Setting Conditions

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  • Price Conditions: Traders can specify price conditions, such as the trigger price for stop orders or the limit price for limit orders, at which the order should be executed.
  • Volume Conditions: Some conditional orders are based on volume thresholds, such as the minimum trading volume required for the order to be executed.

Execution

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  • Automatic Execution: Conditional orders are executed automatically by the brokerage platform when the specified conditions are met, eliminating the need for manual intervention by the trader.
  • Real-time Monitoring: Traders can monitor the status of their conditional orders in real-time, allowing them to adjust their trading strategies or modify their orders as market conditions change.

Examples of Conditional Orders

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  • Stop-Loss Orders: A trader sets a stop-loss order to sell a stock if its price falls below a certain level, protecting against further losses.
  • Limit Orders: An investor places a limit order to buy a stock at a specific price or lower, ensuring that the order is filled at a favorable price.
  • Trailing Stop Orders: A trader sets a trailing stop order to automatically adjust the stop price as the market price moves in their favor, locking in profits while allowing for potential further gains.

Real-world Application

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  • Day Trading: Day traders use conditional orders to implement rapid-fire trading strategies, capitalize on short-term price movements, and manage risk effectively in volatile markets.
  • Investment Planning: Long-term investors use conditional orders to automate their investment plans, such as dollar-cost averaging or portfolio rebalancing, based on predefined criteria.
  • Risk Management: Institutional investors and fund managers use conditional orders to hedge their portfolios, limit downside risk, and preserve capital in uncertain market conditions.

Sources & references

Arti

Arti

AI Financial Assistant

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Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000 Invezz related data points, has read every piece of research, news and guidance we\'ve ever produced, and is trained to never make up new...