Forex 101Lesson 6
Types of Forex orders
Order management is an important aspect that is essential to not just your trading style but also to managing risk better. While forex
trading might look as simple as hitting the ‘Buy’ or ‘Sell’ order button
and closing the trades on profits (or on losses); there many ways that
a trader can approach the markets besides just clicking the button. In
this article you will learn about the different ways to place forex orders as well as what each of these mean.
Forex orders can be classified into two main categories:
Market orders
Limit Orders
Market Orders
Market order is very common and something most would be familiar with if they have traded forex for a while. A market
order is defined as the order to buy or sell a security at the current market price. This is as simple as hitting the buy or
sell button. For example, if EURUSD was currently trading at
1.31051 (bid) and you want to buy, you simply place a market
order by clicking the ‘Buy’ button. When your order is placed, it is nothing but a market order that is executed. Likewise, when you close your trade by clicking on ‘Close’ you place a
market order to ‘Sell’ to close that previous buy position.
When is a market order useful
Market orders are ideally used in fast moving markets and when you want to make a quick profit for a couple of pips. Therefore, market orders are usually preferred
by scalpers or when you want to trade a news event and take advantage of a market that is set in a particular direction. Market orders help you to get in and out of
trading quick and easy. So if your trading style is based
on scalping or to make a few pips in profits, market
orders are the most ideal type of orders to use.
Limit Orders
Limit orders are not that common and are generally used by experienced traders. A limit order is defined is as
an order to buy or sell a security at a specific price. When placing a limit order, there is no guarantee that
your order will be filled (executed). This is due to the
nature that a limit order is only triggered when the
price you mentioned is reached.
When are Limit orders useful
Limit orders are useful when you are trading long term, or on higher time frames
and can also depend on your trading strategy and approach. Limit orders also
usually carry a period of expiry. When placing limit orders, you can choose the
GTC option (Good till cancelled) or End of day expiry (where the order expires by
end of day). Alternatively, you can also specify a time period after which if the
limit order is not reached it automatically expires.
While most swing traders make use of limit orders, some intra-day traders also use
limit orders and it purely depends on the trading style and strategy that they
follow.
Another benefit of using limit orders is that you do not have to sit in front of your charts waiting for price to reach your preferred level. You can just place a limit
order and the order will be triggered whenever price reaches your limit order level.
Stop orders
Stop orders are usually used along with limit orders. As the name implies, a stop order is defined
as an order to buy or sell (in other words: to close your trade) when price reaches the specified
stop order level. Stop orders are also known as stop loss orders but also refer to take profit
order. To better understand stop orders, let’s take the following example:
Buy 1 Lot of EURUSD, Limit order at 1.32 with stop orders at 1.325 and 1.31, GTC
So what does this mean?
You are buying 1 lot of EURUSD with a limit order at 1.32. The order is triggered only when EURUSD
reaches 1.32 with no expiry as it is a Good-till-cancelled type of expiry. At the same time, you
limit your profit and losses to 1.325 and 1.31. So if EURUSD reaches 1.32 and drops to 1.31 (where in
you are in a losing trade); your stop order (stop loss order in this case) is triggered. Your trade is
closed when price falls to 1.31.
Likewise, when price reaches 1.325, your stop order is triggered and gets you out of the market
with 1000 pips in profit.
Order type and trading strategies
The types of orders you use are usually dictated by a trading strategy that you are using. Some trading methods for example require you to
place a limit order on a recent swing high or at the open or close of the previous candle. Similarly scalping strategies require you to trade based
on price action and thus place orders at market.
If you are wondering which of the above two types of orders are better; the answer is both are good. It only depends on what your trading
objective and style is. Stop orders are essential however and must be used
regardless of the type of order that you use. Stop orders, especially
stop loss orders prevent your capital from depreciating against any unexpected price moves and thus provide you with some capital to face the next trading day.