Trailing Stops, Limit, Stop and OCO Orders Explained, Plus Short Selling

Choosing where to trade is only half of execution. The other half is the type of order you use to get in and out. Each order type answers a different question: do you want certainty of price, or certainty of fill? This article explains the common types with worked examples, then covers short selling. Platform names and behaviours differ, so the descriptions here are general.

Market orders

A market order buys or sells straight away at the best available price. It gives you certainty of fill and no certainty of price. In a quiet, liquid market the fill is close to the quote. In a fast market or in thin conditions it can be noticeably worse than the price you saw, and that gap is slippage.

Limit orders: a better price or nothing

A limit order sets the worst price you will accept. A buy limit sits below the current price and a sell limit above it. It fills at your price or better, but may never fill if the market does not reach it, or may fill and then keep moving through your level.

Say the UK 100 index trades at 7,350, with support near 7,300 and resistance near 7,400 (invented levels). A buy limit at 7,300 waits for a pullback to support. A sell limit at 7,400 waits for a rally to resistance. Many traders use limit entries at levels they have already marked, as in the ideas from Support and Resistance Zones. Take-profit orders are also limit orders: they sit at a better price than the market.

Stop orders: a trigger beyond the market

A stop order lies in the opposite place from a limit. A buy stop sits above the current price and a sell stop below it. Nothing happens until price reaches the level, and then the order becomes a market order. A stop entry is used for breakouts: you want to be in only if price proves it can move. A stop-loss is a stop order on an existing position, set to exit if the market moves against you.

Say a stock is consolidating just below $250 (an invented price). A trader who wants to buy only if it breaks higher places a buy stop at $252. If price never gets there, there is no trade. If it does, the order fills at the next available price, which may be above $252 in a fast move.

Stop-limit orders

A stop-limit order has two prices: a stop price that triggers it, and a limit price that caps how far it may fill. Once triggered, it becomes a limit order instead of a market order. That protects against a bad fill, and it creates the opposite risk: if price gaps through the limit, the order does not fill at all. For a protective stop-loss, that can mean staying in a losing trade. Many traders prefer a plain stop for protection for that reason, and use stop-limits for entries where a poor fill matters more.

Trailing stops

A trailing stop is a stop order that follows price in your favour at a fixed distance and never moves back. For a long position it rises as price rises, and holds still if price falls. It lets a trade run while keeping a protective level a set distance behind the best price.

A long trade is opened at 1.0850 with a 40-pip trailing stop. The stop starts at 1.0810. Price rises to 1.0920, and the stop follows to 1.0880. Price then falls and touches 1.0880, and the position closes with a gain of 30 pips. If price had never reached 1.0880 again, the stop would simply have continued upward behind each new high.

A short trade works in mirror image. Short an index at 20,000 with a 50-point trail, so the stop starts at 20,050. Price falls to 19,800 and the stop follows down to 19,850. If price rebounds to 19,850, the trade closes with a gain of 150 points.

Two cautions. First, on some platforms the trail is managed by the trading terminal on your computer, and it only updates while the platform is running and connected. On others it is held on the broker's server. Check which one applies to you. Second, a tight trail sits inside normal noise and is hit by routine pullbacks, while a wide one gives back a lot of profit. The distance is a choice to test, and structure- or ATR-based rules are discussed in the previous article.

OCO orders: one cancels the other

An OCO (one-cancels-the-other) order links two orders so that when one fills, the other is cancelled automatically. It has two common uses.

• Bracketing a range before an event or breakout. With EUR/USD consolidating between 1.0800 and 1.0900, a trader places a buy stop at 1.0910 and a sell stop at 1.0790. Whichever breaks first fills, and the other is cancelled.
• Exiting a position. A stop-loss and a take-profit are linked, so that when price hits one, the other disappears and does not become an unwanted new position.

Not every platform offers OCO natively, and some call it something else, such as a bracket or an if-done order, which links an entry to an attached stop and target. Where it is missing, you may have to cancel the leftover order by hand, and forgetting to do so is a classic way to end up in an unplanned trade. In a very fast market, both sides of a bracket can be triggered before the cancellation takes effect, so test how your platform behaves.

Short selling

Short selling means selling first and buying back later, aiming to profit from a fall. With physical shares, the seller borrows the shares from a lender, sells them, and later buys them back to return them. The profit is the sale price minus the repurchase price, less borrowing fees and any dividends owed to the lender during the loan. Availability of shares to borrow varies, and a lender can sometimes recall them.

The risk is not symmetrical. A bought share can fall to zero, so the loss is limited to what you paid. A shorted share has no ceiling on how high it can go, so the potential loss is unlimited, and a stop-loss that can be gapped through does not remove that. This is why short positions deserve extra care with size and stops.

In derivatives, selling short is simpler. With a CFD, spread bet or futures contract, you sell the contract directly, with no borrowing of shares involved, and profit as price falls. Financing is still charged or credited, and fees depend on the provider. See Leverage and Margin Trading Explained for how financing is calculated.

Physical shares and CFDs compared

Tax rules differ by country and by product, so check them with your provider or a tax adviser before choosing between the two.

Choosing an order type

• Want certainty of fill and accept the price: market order.
• Want a price or better and accept possibly no fill: limit order.
• Want to enter only after price confirms a move, or exit if it fails: stop order.
• Want to let a winner run with protection that follows: trailing stop.
• Want two outcomes linked so only one happens: OCO or bracket order.

Whatever the type, read how your own platform treats expiry (good for the day or until cancelled), partial fills and what happens to orders when the market is closed. Orders that sit overnight can be filled at the next open at a gap. Leveraged and short positions can lose money quickly, and none of this is a recommendation to trade.

Sources: standard order type definitions used by exchanges and brokers, and GOV.UK guidance on stamp duty reserve tax at 0.5% on electronic share purchases. Trailing and OCO behaviour varies by platform, and all prices in the examples are invented.