Before you can go around being the kind of the Forex universe, you need to know how to place your orders in a way that will help them work for you. In other words, there is nothing better you can do to move forward with your Forex journey than to learn a little about the various order types available and how they all relate to what you are attempting to execute.
In the most common of definitions, an order refers to an entry into or exit from a trade. The exact way that you pull this off will be determined by what kind of order you decide to place in the market. It is important to understand fully what kind of order types are on offer from the broker you decide to trade with. They should be capable of offering you the full array of options, but you definitely want to check on this before assuming that they will all have everything that they should.
There are a lot of order types that we will touch on in this piece, so it is important to understand right from the top that there are two main categories that these orders fall under, and then there are several sub-categories worth considering as well. Let us start with the two main types of articles from the top. There are market orders, and there are pending orders. A quick definition of each is helpful.
A market order is an order that a trader places with the intention of it being immediately executed by the broker at whatever the prevailing price of the currency pair is at the time. The trader that places a market order is not as concerned with getting the very best price as much as they are concerned with getting into the trade immediately. Their primary concern is on getting themselves into the currency pair that they have selected at the current prices rather than waiting for any kind of change in the market.
Those placing a pending order will have set a limit that they would like to pay for their trade, and they are not going to have that order executed until the price of the pair hits their limit. The purpose of this is to try to find a better entry point on the pair than what they might otherwise get. It is a little bit of a risk to wait, but it can also reduce the chances that one will overpay for their trade.
|Market Orders||Pending Orders|
Market Order Explained
We have already touched a little bit on what a market order is, but for an even more in-depth explanation, you might want to think of this type of order as the same type of thing a person does when they go to the store and purchase a must-have item at whatever price the store happens to have it available at today. Perhaps you stop at a gas station and purchase a sandwich that is significantly higher priced than what you could get one for at a place that specialized in sandwiches (and certainly a lot more than what it costs to make one at home!). You are paying the market price because you want the sandwich right now. The same idea holds true when talking about market orders on currencies. The trader wants to own the currency pair they are looking at, and they are willing to pay whatever the market deems appropriate for that pair at this time.
Limit Order Explained
The limit order is something entirely different from the market order. With this type of order, the investor is setting a limit for how much they are willing to buy or sell a currency for, and they are waiting for it to hit that price before the trade is executed. What this means is that they don’t necessarily have to sit around and wait for the currency to actually hit the price they are looking at to make the trade. Instead, they set the trade up now, and allow the computers to do the actual trading when the prices that they set ahead of time are reached. This frees them up to focus on other things in their life while still always getting the very best price on all of their orders.
Buy Limit Order
When setting a buy limit order, the trader is agreeing to purchase the currency pair they have been looking to buy at a price that is lower than where it is currently trading. They set the limit that they are willing to pay for it, and then they just sit back and wait for the market to reach their price (hopefully). Thus, they can get the currency only at a price that they deem to be fair right now. This takes a lot of the emotion out of their trading, and that should lead to better results in the long run.
Sell Limit Order
The opposite of the buy limit order, a sell limit order is when a trader agrees ahead of time to sell a currency they already hold at a price that is higher than where it is already trading. Obviously, most traders are looking to sell their currencies at prices that are higher than what they buy them for, but setting the sell limit order means that they can sell that currency right when it hits their price automatically. They do not have to wait around with their finger on the button to make the sell. The computers will do this automatically for them if they have set up the limit order.
Stop Entry Orders
An interesting concept here is that some people prefer to place so-called “stop entry orders” with the hope of catching a wave of momentum in one direction or another. Perhaps the trader has some idea of where they believe the price of a currency pair is headed, but they would like to see some price action help confirm their convictions on this order. A good way to do that is to let the price do what it is going to do up to the point where they have seen enough evidence that they are ready to pull the trigger and get involved in the trade. One way to do that is via stop entry orders.
Stop entry orders literally allow the trader to set a price above or below the current price where they would like to entry into a trade. The difference here is that a stop entry order is taken in the same direction as where they trade has been moving already. In other words, if a trader looks at the EUR/USD and believes that it will decline in price, they can set a stop entry order to sell the currency when it drops say 20 pips from its current price. The sell order will be instantly executed when the pair drops 20 pips as instructed, but the trader will not be involved in the trade at all until it reaches that point. A trader can also do the exact same thing in the inverse on the buy side.
The point of all of this is to get into a trade as the momentum of that trade appears to pick up. When it looks like the trade is moving in the direction that you suspected it would, then it is a good time to get involved and start making some money on it. Thus, a stop entry order can help make that happen.
Stop Loss Order
So, you have entered a trade and are ready to make some money on it? Great! but at the same time you are a wise trader and you know that you always have to account for risk as well. You cannot allow yourself to go into a trade without the safety net of a stop loss order.
A stop loss order automatically triggers when the trade you make moves against you so many pips. What this means is that your trade will automatically be bought or sold (the opposite of whatever you opened the trade with) when it moves a set number of pips away from your entry price.
Let’s say you purchase USD/CAD at a price of 1.0200. You decide that you want to curtail your risks from getting too high and set a stop loss order of 50 pips at the same time. This means that if the currency pair hits 1.0150 before you exit the trade manually, then the system will automatically exit the trade for you at that price. You will take on a 50-pip loss in that scenario, but it may prevent additional losses if the trend on the currency continues to be bearish. At least in this scenario you can avoid taking on even larger losses that you might otherwise have had to deal with.
A trailing stop order can be extremely helpful if you indeed to open a trade that you plan to keep open for some time. The point of a trailing stop is to establish a point at which you no longer want to stay in the trade. It is similar to the stop loss order in that a trailing stop is used to keep a trader from losing too much of their trade no matter which way it goes.
The trailing stop literally trails the price of the currency. Let’s again go to our example of buying the USD/CAD pair at 1.0200. You believe that it will rise, but you want to keep that 50 pip stop loss in motion with you as the pair moves along. You can set a trailing stop order to ensure that you never lose more than 50 pips on the trade even as it moves higher and higher.
If you are right about the direction of the pair, and it continues to climb, you will see your trailing stop climb with it as well. Imagine the currency is trading just as you had hoped, and it moves up to 1.0250. You are up 50 pips! You certainly don’t want to give up all of those gains, but you also may feel that the currency has even higher to rise. If so, then wouldn’t it be nice to continue to collect on those gains? That is why you can place a trailing stop to allow your exit price to only be a certain distance away from its highest point. If you are up 50 pips right now, then the trailing stop loss will adjust to sit at 1.0200. If the currency does come back down to that point, then you would come out of the trade break even, but at least you didn’t give up your 50 pips and then some.
The trailing stop loss order will trail behind the price of the currency the entire time that it is in place.
Limit Orders or Stop Orders?
Newer traders are likely to get these two order types confused as they seem quite similar to one another. The thing to remember about these order types is that they differ in the sense that you only use stop orders to literally prevent additional losses on your trade, but you use limit orders to enter or exit a trade at a specified price.
Limit orders are ideal for getting into a currency at a price that you deem fair. Stop orders are ideal for risk management once you are involved in the trade. Setting limits and parameters around all of your trades is always highly recommended, regardless because this helps to manage risks, and we all know that managing risks is a big part of being an excellent trader. Those who can’t even manage to do this have no business getting into Forex trading until they can learn to do so.
Other Types of Orders
There are just a few other types of orders that are good to hit on briefly while we have your attention here. We want to touch on these quickly to give you an idea of some other terms you may see in regards to Forex orders.
Good Until Cancelled (GTC) Orders
You can set up an order that remains good until canceled by you. Your broker will never cancel the order. It will either execute, or you will have to decide on your own to get into the system and cancel it. You need to bear in mind that it is your responsibility to take care of such an order and make it either gets executed or canceled depending on what you want to happen with it.
One Cancels the Other (OCO) Orders
It is possible to set up two or more orders at the same time that may contradict one another. If you have orders that contradict each other, then it is important for the system to recognize which order you actually want to execute when. Perhaps you want one to go to effect and allow the other to cancel out. If that is the case, then you should set an OCO order that does exactly that for you.
Good For the Day (GFD) Orders
Maybe you feel a certain way about a currency pair, but are only confident of your observations for a limited amount of time. There is nothing wrong with this. You can set up your order to only be good until the end of the day. You don’t commit to your order beyond the end of the day, and it is either executed or not based on the price action and the parameters that you have set up for that order.
There are a ton of different order types when it comes to Forex trading, and it is all up to you to figure out which order type makes the most sense for the execution that you need in the marketplace at this time. If you can figure all of that out, then you can at least start to think about trading.