In the world of forex trading, there are various types of orders that traders use to effectively manage their trades. While these order types may differ slightly depending on the broker, there are some fundamental ones that are widely accepted. Understanding these order types is crucial for traders to make informed decisions when entering or exiting the market. By utilizing different order types, traders can tailor their trading strategies to suit their individual preferences. This article will explore the primary forex order types and how they can be applied in live trading.
MARKET ORDERS:
A market order is one of the simplest and most commonly used order types in forex trading. As the name suggests, a market order is executed at the prevailing market price. If a trader wants to enter the forex market immediately, they can place a market order, and their trade will be executed at the current market price.
Market orders are particularly favored by scalpers and day traders who aim to enter and exit the market quickly, in line with their trading strategy.
Example:
Let's consider the EUR/USD currency pair. The live prices displayed on the deal ticket show the current buy and sell prices. If a trader wants to buy the EUR/USD pair at 1.1392.9, placing a market order would result in an immediate execution at the existing price. The same principle applies to selling or short positions.
ENTRY ORDERS:
Another common type of order in foreign exchange (FX) trading is the entry order. These orders offer a unique feature where they can be set at prices that are different from the current market prices. When the price reaches the predetermined level, the conditions for the entry order are satisfied, and a new trading position is established. Trading with entry orders has several advantages, one of which is the ability to execute trades without being actively present in front of the computer. This makes it possible to be a part-time trader and still participate in the market. Entry orders are typically used for breakout strategies or other approaches that require execution when the price surpasses a specific point.
LIMIT ORDERS:
In forex trading, there are two types of limit orders:
1. Limit orders to open a trade
The first type is a limit entry order, which aims to secure a more favorable entry price. For example, if the current trading price of the EUR/USD currency pair is 1.1294 and you believe it will decline to 1.1200 before rallying, you can place a limit order to buy at 1.1200.
Conversely, if the EUR/USD is trading at 1.12939 and you anticipate it will rise to 1.1300 before experiencing a decline, you can set a limit order to sell at 1.1300. When utilizing a limit order, your trade will only be executed at the price you specified or at a better price if available.
2. Limit orders to close a trade
Another strategy to close a trade is by using a limit order. This type of order allows you to specify a specific level at which you want to exit your trade when the market moves in your favor. Let's say you bought the EUR/USD currency pair at a rate of 1.1300 and you want to close the trade when it shows a profit of 100 pips. In this case, you would set a sell limit order at the 1.1400 level, which is 100 pips above your entry point. This means that if the market reaches 1.1400, your trade will automatically be closed, locking in your desired profit.
Conversely, if you sold the EUR/USD at 1.1300 and you want to exit the trade with a profit of 100 pips, you would place a buy limit order at the 1.1200 level, which is 100 pips below your entry point. If the market reaches 1.1200, your trade will be closed, and you will achieve the desired profit.
Using limit orders in this way allows you to set specific price levels at which you want to exit a trade, helping you to manage your risk and lock in profits when the market moves in your favor.
Graphical representation of a limit order on a forex chart:
STOP ORDERS:
Stop orders play a significant role in forex trading, and they come in two different forms:
1. Stop orders for trade entry
The first type is a stop order used to initiate a trade. These orders are commonly employed when trading breakouts. For example, let's say you believe that the EUR/USD currency pair will continue to rise after surpassing the 1.1500 level. In this case, you would set a buy stop order at 1.1501. Once the market reaches and surpasses 1.1501, your buy stop order will automatically convert into a market order, and you will be filled at the next available price.
Similarly, if you anticipate that the EUR/USD will decline further once it drops below the 1.1200 level, you would place a sell stop order at 1.1199. Once the market reaches and falls below 1.1199, your sell stop order will convert into a market order, and you will be filled at the next best available price.
2. Stop orders to close a trade
In addition, you have the option to use a protective stop order to close a trade when the market moves against your position by a specified amount. Let's say you purchased the EUR/USD currency pair at a price of 1.1500 and you want to limit your potential loss to 50 pips (price movements), you can place a sell stop order at the 1.1450 level, which is 50 pips below your entry price. This order will automatically trigger the closing of your trade if the market reaches or goes below the 1.1450 level.
On the other hand, if you sold the EUR/USD at a price of 1.1400 and you want to restrict your risk to 50 pips, you can place a buy stop order at the 1.1450 level, which is 50 pips above your entry price. If the market reaches or goes above the 1.1450 level, this order will be activated and close your trade.
Graphical representation of a stop order on a forex chart:
HOW TO PLACE A FOREX ORDER?
Placing a forex order is a relatively straightforward process, although it may vary slightly depending on the broker you are using. Here are some general steps to follow:
1. Open the trading platform and locate the "deal ticket" or "order" section.
2. Within the order section, choose whether you want to buy or sell a currency pair.
3. Determine the desired price level at which you want to enter the trade. This price will determine the type of order you place, based on whether it is above or below the current market price.
4. Consider setting stop-loss and take-profit levels. These are price levels that, when reached, will automatically close your trade to limit potential losses or secure profits.
5. Once you have specified all the necessary details, review them to ensure accuracy.
6. Finally, submit your order to execute the trade.
It's crucial to familiarize yourself with the trading platform you are using before engaging in any trading activity. This will help you avoid any unnecessary errors when placing or managing your trades.
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