What can you order in FOREX market?! Actually the word order refers to the way to enter or exit a particular trade. There is a large diversity of types of orders and here we will cover most of them.
Market Order: an order to buy or sell at the current market price. It means that you click on the buy or sell button after having specified your deal size. You like the current price, you click once and the trade is done! The order is processed instantly, which means that you get the price shown exactly when you have clicked. No surprises!!
Limited Order: an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. Let’s say that the current trading price for EUR/USD is 1.2050. However, you won’t think about trading until it is 1.2070. One option is to wait in front of the monitor for the desired price and once it is 1.2070 you click a buy market order. Another less time consuming option is to set a buy limit order at 1.2070. Once this is done you can walk away from your computer, take a shower (or even a bubble bath), take your dog for a walk, meet your friends for breakfast, lunch or dinner and even watch all the replays of “American Idol”! The trick is that if the price goes up to 1.2070, your trading platform will AUTOMATICALLY perform a buy order at that price! Don’t you just love when things are done for you?! There are two categories of limited order you should get familiar with. Here they are:
· GTC (Good till cancelled): A GTC order remains active in the market until you decide to cancel it. Your FOREX broker will not cancel the order at any time. This means you are responsible for it.
· GFD (Good for the day): A GFD order remains active in the market until the end of the trading day. Since foreign exchange is an ongoing market the end of day must be a set hour.
Stop-Loss Order : also an order placed to buy or sell at a certain price. The order contains the same two variables, price and duration. Stop-loss order is similar to limit order. The only difference is that stop-loss order prevents additional losses if price goes against you. A stop-loss order remains active until the position is liquidated or you cancel the stop-loss order.
For example, you bought EUR/USD at 1.2230. You don’t want to lose too much in case things go wrong. So you set a stop-loss order at 1.2200, meaning that if your predictions are wrong and EUR/USD drops to 1.2200 instead of going up and making you profits (NO!!!) your trading platform would AUTOMATICALLY execute a sell order at 1.2200 and close your position out for a 30 pip loss (hmmm…).
Why is this useful? Well, let’s just say that you don’t want to sit in front of your computer day and night hungry, depressed and smelly; worrying that if you move an inch from the monitor you will lose all your money. With stop-loss order things are taken care automatically for you. This way you can apply your strategies and make money while having a picnic with your family at the back yard. We have to add another set of letters for you to remember:
- OCO (Order cancels other): An OCO order is a mixture of two limit and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled.
For example, let’s say that the price of EUR/USD is 1.2040. You cannot figure out at the moment how things might turn out, but you don’t want to miss on anything. OCO is the way to get two rabbits with one shot. Let’s say that you want either buy at 1.2095 or sell if the price falls below 1.1985. This means that if the price goes up to 1.2095 your buy order will be executed and the 1.1985 sell order will be automatically cancelled!
What is a price gap and how does it affect your orders?
A price gap signifies the following:
- Current bid price is higher than the ask price of the previous quote;
- or Current ask price is lower than the bid of the previous quote
Current bid price is higher than the ask price of the previous quote; or current ask price is lower than the bid of the previous quote. It is important to understand that you may not be always able to see a price gap on the chart since it can be enclosed in a candle. As the definition implies, in some cases you would need to observe the ask price, while the chart shows only the bid price. The following rules are applied to pending orders executed during a price gap:
- If your Stop Loss is within the price gap, the order will be closed by the first price after the gap.
- If the pending order price and Take Profit level are within the price gap, the order will be cancelled.
- If the Take Profit order price is within the price gap, the order will be executed by its price.
- Buy Stop and Sell Stop pending orders will be executed by the first price after the price gap. Buy Limit and Sell Limit pending orders will be executed by the order’s price.
For example: bid is listed as 1.09004 and ask is 1.0900. In the next tick, bid is 1.09012 and ask is 1.0902:
- If your Sell order has stop loss level at 1.09005, the order will be closed at 1.0902.
- If your Take Profit level is 1.09005, the order will be closed at 1.0900.
- If your Buy Stop order price is 1.09002 with take profit at 1.09022, the order will be cancelled.
- If your Buy Stop price is 1.09005, the order will be opened at 1.0902.
- If your Buy Limit price is 1.09005, the order will be opened at 1.0900.
- A market order is where you enter the trade right now.
- A limit order is where you want to enter at a cheaper price.
- A Stop order is where you want to enter at a higher price (breakouts).
- A Stop-Loss order gets you out of your losing trade and protects your capital.
The bottom line is to make things as simple as possible. Always check your broker’s policies on each order type. Every broker has its own rules so make sure you know them all.
The bottom line, you need to know the different types of forex orders and implement them in your forex trading strategy. As you can tell, stop losses are extremely useful when it comes to Forex trading, especially if you don’t want to sit in front of your monitor, biting your nails all worried that you will lose your money. At some point, you’ll be using stop-loss orders when market news is being released so you can reduce the risk of remaining open in the market and be exposed to unpredictable events.
What’s more, in the next levels, you can use other more ‘sophisticated’ forex limits and stop orders. These include the trailing stop order for example and the take profit order. Whether you are going to use fundamental or technical analysis (or both), it is a must-have knowledge to trade the forex markets.
Conventional order types such as markets, limits and stops are traditional, user-friendly ways of entering and exiting the forex marketplace. More advanced order types, such as trailing stops and multi-brackets, furnish active traders with scores of strategic alternatives. Ultimately, selecting a well-suited forex order type depends upon one’s objectives, resources and style of trading.
That’s a lot of terms we covered today! Good job on reading all the way down here. With this attitude, you’ll be trading like a pro in no time! And don’t worry if things seem complicated, it gets easier with practice! Within a couple of weeks, you will be setting your own limit orders on your trading platform with one eye closed! In the meantime, feel free to download the cheat sheet below to help you along the road.