Types of Forex Orders - Part One

“Would you like pips with that?”

Okay, not that type of order.

An order is an offer sent using your broker’s trading platform to open or close a transaction if the instructions specified by you are satisfied.

Basically, the term “order” refers to how you will enter or exit a trade.

Here we discuss the different types of orders that can be placed in the forex market.

Be sure that you know which types of orders your broker accepts.

Different brokers accept different types of forex orders.

Order types

There are some basic order types that all brokers provide and some others that sound weird.

Orders fall into two buckets.

1. Market order: an order instantly executed against a price that your broker has provided.
2. Pending order: an order to be executed at a later time at the price you specify.

Here’s a quick “map” of the different types of orders within each bucket.

Market order

A market order is an order to buy or sell at the best available price.

For example, the bid price for EUR/USD is currently at 1.2140 and the ask price is at 1.2142. If you wanted to buy EUR/USD at market, then it would be sold to you at the price of 1.2142.

You would click buy and your trading platform would instantly execute a buy order at that (hopefully) exact price.

If you ever shop on Amazon.com, it’s kinda like using their 1-click ordering. You like the current price, you click once and it’s yours!

The only difference is you are buying or selling one currency against another currency instead of buying a Justin Bieber CD.

Please keep in mind that depending on market conditions, there may be a difference between the price you selected and the final price that is executed (or “filled”) on your trading platform.

Limit order

A limit order is an order placed to either buy below the market or sell above the market at a certain price.

This is an order to buy or sell once the market reaches the “limit price”.

• You place a “buy limit” order to buy at or below a specified price.
• You place a “sell limit” order to sell at a specified price or better.

Once the market reaches the “limit price” the order is triggered and executed at the “limit price” (or better).

In the image above, the blue dot is the current price.

Notice how the green line is below the current price. If you place a BUY limit order here, in order for it to be triggered, the price would have to fall down here first.

As you can see, a limit order can only be executed when the price becomes more favorable to you.

Notice how the red line is above the current price. If you place a SELL limit order here, in order for it to be triggered, the price would have to rise up here first.

For example, EUR/USD is currently trading at 1.2050. You want to go short if the price reaches 1.2070.

You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a sell market order).Or you can set a sell limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class).

If the price goes up to 1.2070, your trading platform will automatically execute a sell order at the best available price.

You use this type of entry order when you believe the price will reverse upon hitting the price you specified!

A limit order to BUY at a price below the current market price will be executed at a price equal to or less than the specified price.

A limit order to SELL at a price above the current market price will be executed at a price equal to or more than the specific price.

Stop entry order

A stop order “stops” an order from executing until price reaches a stop price.

You would use a stop order when you want to buy only after price rises to the stop price or sell only after the price falls to the stop price.

A stop entry order is an order placed to buy above the market or sell below the market at a certain price.

• You place a “buy stop” order to buy at a price above the market price, and it is triggered when the market price touches or goes through the Buy Stop price.
• You place a “sell stop” order to sell when a specified price is reached.

In the image above, the blue dot is the current price.

Notice how the green line is above the current price. If you place a BUY stop order here, in order for it to be triggered, the current price would have to continue to rise.

Notice how the red line is below the current price. If you place a SELL stop order here, in order for it to be triggered, the current price would have to continue to fall.

As you can see, a stop order can only be executed when the price becomes less favorable to you.

For example, GBP/USD is currently trading at 1.5050 and is heading upward. You believe that price will continue in this direction if it hits 1.5060.

You can do one of the following to play this belief:

1. Sit in front of your computer and buy at market when it hits 1.5060 OR
2. Set a stop entry order at 1.5060.

Stop loss order

An order to close out if the market price reaches a specified price, which may represent a loss or profit.

A stop loss order is a type of order linked to a trade for the purpose of preventing additional losses if the price goes against you.

If you are in a long position, it is a sell stop order.

If you are in a short position, it is a buy stop order.

Remember this type of order

A stop loss order remains in effect until the position is liquidated or you cancel the stop loss order.

For example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you set a stop loss order at 1.2200.

This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 the best available price and close out your position for a 30-pip loss (eww!).

Stop losses are extremely useful if you don’t want to sit in front of your monitor all day worried that you will lose all your money.

You can simply set a stop loss order on any open positions so you won’t miss your basket weaving class or elephant polo game.

Trailing stop

A stop loss order which is always attached to an open position and which automatically moves once profit becomes equal to or higher than a level you specify.

A trailing stop is a type of stop loss order attached to a trade that moves as the price fluctuates.

Let’s say that you’ve decided to short USD/JPY at 90.80, with a trailing stop of 20 pips.

This means that originally, your stop loss is at 91.00. If the price goes down and hits 90.60, your trailing stop would move down to 90.80 (or breakeven).

Just remember though, that your stop will STAY at this new price level. It will not widen if the market goes higher against you.

Going back to the example, with a trailing stop of 20 pips, if USD/JPY hits 90.40, then your stop would move to 90.60 (or lock in 20 pips profit).

Your trade will remain open as long as the price does not move against you by 20 pips.

Once the market price hits your trailing stop price, a market order to close your position at the best available price will be sent and your position will be closed.

Please refer to Part Two for more information.

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Reprinted from babypips, the copyright all reserved by the original author.