Types of Forex Trading Orders
When you are trading currencies via our forex software or on the phone, there are different orders that you can place. In our free FX training, we teach our customers how to trade currencies using these. Best Forex Broker in UK
Market Orders
A market order is an order to buy or sell a currency at the current market price. When placing a market order, the forex trader only has to specify the currency pair he wants to buy or sell (GBP/USD, USD/JPY, etc.) and the number of lots he is interested in buying or selling. The Ask price is the price the trader will pay when buying and the Bid price is the price he will receive when selling
This is the simplest order to place. In our trading platform, to buy using a market order, simply click the “BUY” side of the quote and to sell, click the “SELL” side. Therefore, with a simple click of the mouse, you can buy and sell currencies almost instantly.
Placing a market order over the phone is just as easy. A trader will ask the forex dealer to buy or sell a specific number of lots of a specific currency after obtaining a two-way quote from the dealer. To learn more about forex quotes and market orders, read “Forex quote – how to read one.”
Limit Orders
In a limit order, the trader not only specifies the currency he wants to buy or sell and the number of contracts but also at which price he wants to do so; in other words, a limit is an order to buy or sell at a specified price or better.
Example: Let’s say that a trader places a limit order to buy 2 lots of GBP/USD at 1.9170. This means that the order can only be executed at a price equal to 1.9170 or lower (lower is always better for the buyer).
Stop Orders
The stop order is an order that is activated when a currency reaches a specified price called the “stop”. This order becomes a normal market order when the quoted prices reach a specified level. Stop orders can be used to enter the market on momentum (like when a resistance or support level is broken), to limit the potential loss after establishing a position, and to protect the profit of an existing position that has moved favourably in price. In forex trading, stop orders are very important. Consequently, all traders that want to participate in the forex market should learn how to use this order properly.
Ex: Protecting an existing position with a stop order: A day trader buys 100,000 (1 lot) of EUR/USD at 1.1355 in anticipation of an expected 80 pip rally in the euro. In order to control his risk, the trader places a stop order of 1.1335 (20 pips below the current price). If the price of the euro was to drop, the trader’s loss would be limited to 20 pips ($200). In our free training, our instructors teach our customers how to set proper stop orders to trade currencies.
Ex: Using a stop order to buy on momentum: A forex trader expects the U.S. dollar to rally against the Japanese yen, but does not want to buy yet because the USD/JPY is approaching a short-term resistance at 118.00. The forex trader instead places a buy stop order 10 pips above the resistance level. His stop is thus placed at 118.10. After this point, unless the USD/JPY goes to 118.10, the order won’t be activated. By doing this, the trader is waiting for the resistance on the USD/JPY to be broken before entering the trade; i.e., he is waiting for the upward momentum on the dollar to be confirmed before buying.
Trailing Stop Orders
A trailing stop order is a stop order that adjusts itself whenever the price moves by a specified amount in the trader’s favour.
Example: Let’s say that an FX trader that has a long, profitable USD/JPY position, needs to leave his computer. He can do one of two things:
He can place a sell stop order a number of pips below the current market price (say 30 pips) or
He can place a trailing sell stop order using a 30 pip stop that adjusts itself every 30 pips. This means that every time the price moves up by 30 pips, the stop is automatically moved up 30 pips in order to protect 30 more pips of profit. It is true that both orders will protect the trader’s existing profit, but only the trailing stop order allows the trader to continue participating in greater profits if they indeed occur.
Conclusion:
An order type might not be much valuable for a long term investor. But, if you are even thinking of being a day trader, then this is the first thing to know.
It can boost your profits or put you at losses. Thus, it is essential to know the difference between each order type and act accordingly.
By doing so, you will know what works best at what time and how it affects your trade and portfolio. Most importantly, you would be able to manage your time, stress, risk, and last but surely not least, money.
