February 10, 2017
To open a position of any kind in the forex market, you need to place an order. An order has all the relevant information about the position, like the position size, entry price, exit price, execution type and other. When your broker receives your order, it will open the position based on the information provided in the order. Now that you know what an order is, let’s cover the main order types, and a few other less-known order types.
The five main order types are:
- Market orders
- Limit orders
- Stop orders
- Take profit orders
- Stop loss orders.
Market orders are the most common type of orders in the forex market. These are instant-execution orders, which means that you are buying or selling a currency instantly at the best available price. For example, let’s say that EUR/USD is trading at 1.0950/53. With a buy market order, you would buy euros at the ask price of $1.0953, and with a sell market order, you would sell euros at the bid price of $1.0950. These orders are usually instantly filled, but in periods of high market volatility your market order can be filled with a different price than you indicated in the order.
Unlike market orders, limit orders become active only if certain conditions are met. A similarity with market orders is that limit orders can also be both buy limit order and sell limit orders. Generally, if you’d like to buy below the current market price, or sell above the current market price, a limit order would be the type of order to use.
For example, if USD/JPY is trading at 110.30 at the moment, and you think that it will rise further to 110.80 but then fall in price, you would use a sell limit order placed at 110.80. After the price reaches 110.80, the sell limit order becomes a usual sell market order and executes the short position. The main advantage of limit orders over market orders, is that you don’t have to wait for the price action to happen to place a market order. The limit order will do the waiting for you.
Just like limit orders, stop orders also become market orders once certain conditions are fulfilled. You’d use stop orders to buy above the market, or sell below the market.
Taking the previous example with USD/JPY trading currently at 110.30 – if you believe that the pair will break 110.80 (this could be a major resistance level) and target 111.20 afterwards, you would place a buy stop order at 110.80. Once the pair reaches 110.80, the buy stop order will become a buy market order. Just place a buy stop order and you don’t have to wait in front of the screen for the price to reach 110.80.
Take Profit Orders
A take profit order automatically closes your position when the target price is reached. You can specify take profit orders inside any other types of orders, like market orders. For example, you placed a market order on GBP/USD at $1.2500, and specified a take profit level of $1.2600. The market order becomes instantly active, and will remain active until the price reaches $1.2600. Here the take profit order will kick in and automatically close your position with a 100-pips profit. Nice, isn’t it?
Stop Loss Orders
Stop loss orders are similar to take profit orders, with the difference that they are used to limit your loss. Once the market goes against you and hits the stop loss price, the position will be automatically closed to prevent further losses. Let’s say that in the previous example your analysis was wrong, and GBP/USD fell from $1.2500 to $1.2400. By using a stop loss at $1.2450, the position would be closed leaving you with a loss of 50 pips instead of 100 pips or more.
There are also a few less-known market orders, which will be covered next.
Good ‘Til Canceled Orders
A good ‘til canceled (GTC) order is similar to a limit order in its nature. As the name suggests, a GTC order remains active until it is either executed, cancelled by the trader, or expired. The expiration of GTC orders is usually set from 30 to 90 days after the trade is entered, but can be specified for any period of time.
Good For the Day Orders
A good for the day order, also called day order, automatically expires by the end of the day if the conditions of the underlying limit or stop order are not met. In this regard, it’s a GTC order with an expiration by the end of the day.
Also called an OCO order, a one-cancels-the-other order is a combination of a limit and stop order previously discussed. The main point here, is that once either the limit order target, or the stop order target is reached, the remaining order is cancelled leaving only one open position.
These are the main order types you will encounter while trading forex. Each of them offer specific advantages, and you should become familiar with them to know under which market conditions they are appropriate to use.