Types of Orders in Derivative Market

In the Derivatives market, an order refers to an instruction given by a trader to a broker or trading platform to execute a buy or sell transaction for a futures or options contract. Orders determine the price, quantity, and timing of a trade. Common types include Market orders, Limit orders, Stop-loss orders, Cover orders, and Bracket orders. These orders help manage risk, maximize profits, and automate trading strategies. Choosing the right order type is crucial, as derivatives are highly leveraged instruments and price movements can be rapid. Proper order management ensures better control, discipline, and efficiency in trading.

Types of Orders in Derivative Market:

• Market Order

Market order is the simplest and most commonly used order type in the derivatives market. It instructs the broker to buy or sell a contract immediately at the best available price. This type of order guarantees execution but not the exact price, which may vary in volatile markets. Traders who prioritize speed over price use market orders, especially in fast-moving markets where waiting for a specific price may lead to missed opportunities. For example, if a trader believes that a futures price will rise quickly, they may use a market order to enter the position without delay. However, in illiquid markets, large market orders may suffer from slippage, meaning the execution price might differ from the expected price. Market orders are beneficial when liquidity is high, ensuring minimal difference between bid and ask prices. Since they are executed instantly, they are often used for scalping or intraday strategies. Despite its speed, the risk with market orders lies in the lack of price control, which can be unfavorable if prices move sharply in the wrong direction. Therefore, traders must assess the market conditions and order size before placing a market order in derivative instruments.

• Limit Order

Limit order allows a trader to specify the price at which they wish to buy or sell a derivative contract. This order will only be executed when the market reaches the specified price or better. For example, if a trader wants to buy a futures contract but only at ₹2,000, they will place a buy limit order at that level. Similarly, if they want to sell at a minimum of ₹2,500, they place a sell limit order. This order type provides more control over entry and exit points compared to market orders. However, there’s a trade-off: execution is not guaranteed if the market does not reach the set price. Limit orders are useful in volatile markets or when a trader expects a retracement to a desired level before a move continues. They help in planning trades and reducing emotional decision-making. Moreover, limit orders help avoid slippage and provide better price discipline. However, there’s always the risk of missed opportunities if prices move sharply and never return to the limit level. For effective usage, traders often monitor trends and support-resistance levels to place limit orders strategically in derivative instruments.

• Stop Loss Order (Stop Order)

Stop loss order, also known as a stop order, is a key risk management tool in the derivatives market. It becomes a market order once a predetermined stop price is reached. For instance, if a trader holds a long futures contract at ₹2,000 and wants to limit the loss to ₹100, they can place a stop loss order at ₹1,900. Once the market hits this price, the order is triggered and the position is exited at the best available price. This prevents large losses during sharp market downturns. Stop loss orders are crucial in volatile markets, helping traders protect their capital and reduce emotional stress. They are especially important in leveraged positions common in derivatives trading. While stop loss orders don’t guarantee the exact exit price (due to slippage), they are vital for a disciplined trading approach. Advanced platforms offer trailing stop losses, where the stop price moves automatically as the market moves in the trader’s favor. However, in fast markets, a gap down can lead to execution at a worse price than expected. Therefore, it’s essential to place stop loss levels considering both market structure and volatility in derivative markets.

• Cover Order

Cover order is a type of market order that is paired with a compulsory stop loss order. This structure helps minimize risk while allowing traders to take advantage of leverage. The moment a trader places a cover order, the platform simultaneously places a stop loss order, creating a predefined exit strategy. This feature is especially useful in intraday trading, where price swings can be unpredictable. Since the stop loss is mandatory, brokers offer higher leverage on cover orders due to the reduced risk. For example, if a trader goes long on a futures contract using a cover order, they must set a stop loss level, say ₹10 below the entry price. This ensures that losses are capped. One advantage of cover orders is the simplicity and speed they offer, along with automated risk management. However, they cannot be used for overnight positions or modified once placed in many systems. Also, since the order is executed as a market order, price slippage can occur. Cover orders are ideal for active traders who follow disciplined strategies, especially in volatile derivative markets where rapid price movement necessitates tight risk control.

• Bracket Order

Bracket order is a three-in-one order setup consisting of a main order, a target (profit booking) order, and a stop loss order. It is widely used for intraday derivative trading and helps automate the entire trade lifecycle. Once the main order is executed (buy or sell), the system automatically places the other two orders. If the price reaches the target, the profit order is executed and the stop loss order is cancelled automatically. Similarly, if the stop loss is hit, the target order is cancelled. For instance, a trader enters a buy bracket order on an index future at ₹1,000, with a profit target at ₹1,050 and a stop loss at ₹980. The software monitors and executes accordingly. Bracket orders offer precise control over risk and reward. They eliminate emotional trading by enforcing discipline, which is critical in fast-moving derivative markets. Traders can also use trailing stop losses within bracket orders to lock in profits as prices move favorably. However, these orders are typically valid only for the trading day and are not suited for long-term positions. Bracket orders are powerful tools for traders who want to ensure a defined risk-reward ratio on each trade with minimal manual intervention.