What is a Day Order?

A day order is an instruction from a trader to their broker to buy or sell a certain asset within a single trading day. This type of order specifies that the transaction must be executed if the asset hits a predetermined price point, known as the “level,” at any time during the trading day on which the order is placed.

Day orders are designed to be short-term, meaning they will expire if the specified price is not met by the time the market closes. This makes day orders distinct from other types of orders, such as good-’til-cancelled (GTC) orders, which remain active until explicitly cancelled by the trader, regardless of the duration.

What are the Types of Day Orders?

There are two primary types of day orders: stop day orders and limit day orders. The distinction between the two lies in the price conditions they set for executing the trade.

Limit Day Orders: A limit day order is placed when the trader specifies a price that is more favorable than the current market price. For instance, if you want to buy shares at a lower price than the market currently offers, you would set a limit day order at that lower price. The order will only be executed if the market price drops to the specified limit.

Stop Day Orders: Conversely, a stop day order is set when the trader specifies a price that is less favorable than the current market price. This type of order is often used to limit losses or to enter a position as a stock price begins to move in a certain direction. The trade will only be executed if the market price reaches the stop price.

How Do Day Orders Differ from Good-‘Til-Cancelled Orders?

Day orders and good-’til-cancelled (GTC) orders serve different purposes and have different durations. While a day order expires at the end of the trading day if not executed, a GTC order remains active until the trader cancels it. This means GTC orders can span multiple trading days, weeks, or even months, providing more flexibility for traders who do not want to monitor their orders daily.

How to Place a Day Order?

Most brokers and trading platforms default to using day orders for trades unless a different time frame is specified. For example, on the IG trading platform, you can place a day order by navigating to the ‘Order’ tab and selecting the current date under the ‘Expiry’ option. This ensures that your order will only be valid for the trading day on which it is placed.

What are the Pros and Cons of Day Orders?

Pros of Day Orders

Day orders are popular among traders for several reasons:

• No Need for Constant Monitoring: Traders do not need to watch the markets continuously, as the order will be executed automatically if the specified price is reached.
• Useful for Intraday Trading: Day orders are particularly beneficial for intraday traders who deal with multiple asset classes, as they can set individual orders that align with their trading strategies and objectives.

Cons of Day Orders

However, there are also some drawbacks to using day orders:

• Market Volatility: Traders must stay informed about market events that could negatively impact their positions. An unexecuted day order left unattended could result in an undesirable position if market conditions change unexpectedly.
• Expiration Risk: If the specified price is not met within the trading day, the order will expire, potentially missing out on favorable price movements that occur after the market closes.

Can You Provide an Example of a Day Order?

Let’s illustrate how a day order works with an example:

Suppose you want to buy 1,000 shares of Company XYZ, which are currently trading at £5.50. You anticipate that the price will dip before continuing its upward trend. Since you do not have the time to monitor the market continuously, you decide to place a limit day order.

You set an order to buy 1,000 shares at £5. If the market price falls to £5 during the trading day, your order will be executed, and you will acquire the shares at the desired price, ready to benefit from the subsequent rebound. However, if the market does not fall to £5 within the day, your order will expire without being executed.

How Can You Build Your Trading Knowledge?

For those new to trading or looking to enhance their skills, educational resources are invaluable. Platforms like IG Academy offer a range of interactive courses, webinars, and seminars designed to help traders understand market dynamics and improve their trading strategies. By leveraging these resources, traders can make more informed decisions and increase their chances of success in the market.