When placing orders with your forex broker, you need to do them appropriately and with a great deal of care. In fact, you should place your orders on the basis of your trading plan, meaning how you want to enter and exit the currency market. This is because your entry and exit points could get skewed if you place the order inappropriately. In this post, we have provided some information as regards a few of the common types of forex orders.
#1: Market Order
This is a very common type of forex order. You can use it when buying a position at the market price immediately. The market price is the bid/ask price displayed on your screen. The market order may also be used to sell an existing position.
#2: Stop Order
A stop order is a type of order that turns into a market order when the price of a currency pair reaches a specified value. It can be made use of to buy a new position or sell an existing position.
Buy stop order: It is an instruction given for buying a currency pair when its price reaches the level specified by you. However, the buy stop order price should be higher than the prevailing market price.
Sell stop order: It is an instruction given for selling a currency pair when its price reaches the level specified by you. However, the sell price should be less than the prevailing market price.
Stop orders are often employed to enter a market when trading breakouts. For example, imagine that the USD/CHF is moving towards a resistance level and you believe that the price of the pair will move higher on breaching its resistance level. In order to trade this pair, you could place a stop buy order at a price level that is a few pips more than the resistance level. A long position will be opened if the price of the currency pair reaches or exceeds the price specified by you.
You can use an entry stop order for trading a downside breakout as well. In order to do this, you have to place a stop sell order at a few pips below the currency pair’s support level. This results in the opening of a short position when the price of the pair reaches price specified by you or goes below it.
Stop orders are also used to limit losses. Every trader suffers losses at some point in time or other, but what impacts the bottom line is the size of the losses that you incur and how you manage your losses. Prior to entering a trade, you should know when and where you should exit your position if the market happens to work against you. One of the best ways to limit your losses is by setting a pre-determined stop order level. This is often referred by the name stop-loss order.
In case you already have a long position on the USD/CHF pair, then you would want the want value of the pair to increase. In order to protect you against the possibility of incurring uncontrolled losses, you may place a stop sell order at a specified price. This will result in the closing of your position automatically when the price of the currency pair reaches that level.
Stop orders are also used by traders for protecting their profits. If your trade is profitable, you might want to move your stop loss order in the same profitable direction for protecting some of the profit you have earned. If a long position has become profitable, you might move your stop sell order from the loss zone to the profit zone for safeguarding against the possibility of incurring a loss in the event of your trade not achieving the profit objective aimed by you because of the market turning against you. In the same manner, you may shift your stop buy order from the loss zone to the profit zone, if your short position has become profitable, so that you gains remain protected.
#3: Limit Order
You can use the limit order when you are planning to open a new position or exit a current position only at the specified or better price. This order would be filled only if the market is trading at the specified or better. While a limit buy order is an instruction for buying a currency pair once the market price reaches the price specified by you, which is lower than the current market price, a limit sell order specifies as to at what price the currency pair should be sold. In this case, the price specified by you must be higher compared to the current market price.
Limit orders are often employed for entering a market when you fade breakouts, meaning you do not expect the price of the currency pair to break successfully past its resistance or support levels.
In addition to using the limit order for going short when the price of the currency pair is near a resistance, it can also be used for going long when the price of the pair is close to a support level.
Further, you can use limit orders to set your profit objective. Prior to placing your trade, you should know as to when you should take profits if the trade goes your way. A limit order enables you to exit the market at the pre-set profit objective. If you are long on a currency pair, you would use the limit sell order to achieve your profit objective. If you are short on the pair, you should use the limit buy order to achieve your profit objective. However, you should be aware that these orders would only accept currency pair prices that are in the profitable zone.
It is important to have a clear understanding of the various types of orders in order to employ the right tools and achieve your objectives. This is because how you are entering the market (trade or fade) and how you are going to exit the market (profit and loss) will decide whether you will achieve your financial objectives or not. There are other types of orders, market, stop and limit orders are the most commonly used ones. You need to become comfortable in using them as improper order execution can cost you a lot of money.