Different Types of Forex Orders Explained
All ready to start trading? But wait how should I enter the market? What should I do?
I’m assuming you’re all set up with your broker at this point and have your account loaded up and Metatrader installed on your system. Once you’re logged in, you’ll see a lot of possible options in there for you. Below you’ll see what kind of orders you can place in Forex and a brief explanation of how you can go about trading foreign exchange pairs using these orders.
Possible types of Forex orders
When talking about entering or exiting the market you should know there are different ways you can enter or exit a trade. You actually place an ‘order’ to do so. An order is your instruction to your broker for execution and managing your account. There are different types of Forex orders that you should know:
A market order is an order placed to buy or sell a security at the current available price. When you see that the current market is the price that you were looking for or you see a possible reason for entering into a trade you execute the order at market rate.
Pending orders allow you to enter market at a price level that you want to. Your trade will only be executed when the market reaches that price level at which you intended to enter. Different types of pending orders include buy limit, sell limit, buy stop and sell stop.
- Buy Limit
It is an order that you place to buy a currency pair at a price that is equal or lower than the price specified in order. When you anticipate that market will fall to this point before heading higher you place a buy limit order.
- Sell Limit
It is an order that you place to sell a currency pair at a price that is equal or higher than the price specified in order. When you anticipate that market will reach to this point before falling lower you place a sell limit order.
- Buy Stop
A Buy stop can be used to get into a trade when it reaches a price on the higher side, as soon as price increments to this higher price you’ve chosen a buy order will be executed. When you anticipate that market on reaching this price level will keep on going higher you place a buy stop order.
- Sell Stop
A sell stop can be used to get into a trade if it reaches a price on the lower side, as soon as price falls from the level is down to your price there will be a sell order executed. When you anticipate that market on reaching this price level will keep on going lower you place a sell stop order.
What will you do if market keeps on going against you? What’s the max amount of loss you’d take on any particular trade should be decided before you enter a trade, it could be 10 pips, 50 pips, 100 pips, 200 pips, and 500 pips and so on according to your trade idea. You will lose all your profits and even your account if it’s small and you over leveraged yourself. Thus it is very important to know where you should get yourself out of a trade and take a loss that you can bear. This order helps you do that. By placing a stop loss you are instructing your broker to close your trade when market reaches this price level.
Stop losses can also be used to lock in profits and keep a trade going as well, for example if you have a trade that is 100 pips in profit, you can consider locking in 50 pips by moving your stop up to that level. However, you must keep in mind that the market gaps at times, these gaps evade stop losses and the trade is closed wherever it opens up, so its always better to bank in your profits and if you want, leave half of your position running.
- Trailing stop loss
It’s a stop loss order that fluctuates with the current price. You can choose how many points away you want to keep it. Let’s say you bought EUR/USD at 1.35300 and you place your trailing stop at 300 points or 30 pips i.e. at 1.35000, now when the market will reach 1.35600 your trailing stop will move up to 1.35300 or break-even. The high the price will go your trailing stop will ascend automatically higher.
One thing you have to keep in mind that your trailing stop will not widen if market starts going against you. It will stay at this 30 pips level. Once market hits your trailing stop your position will get closed. Let’s say you started a position and it went up 31 pips and then the market changed direction, you’d end up with 1 pip profit.
A proper understanding of how to place your stop losses is very crucial in Forex. It can save your account from big damages.
A take profit order is an order that helps you lock profit at a certain price level. This order helps you gain some pips when the market reaches your target price without having you sit in front of the screen the whole time waiting for it. When the market reaches at that specified price level, position is closed with profit that you intended to get. If market retraces beforereaching that point even though that’s few pips only your position will remain open unless you close it manually.
So these were some of the important types of Forex orders which are used commonly and those that you will always find in your Metatrader. Other than these there are certain orders which are also used by some of the traders but due to their complexity and unavailability they are not as much in use., they include OCO (One Cancels Other), OTO ( One Triggers the Other), GTC (Good Till Cancelled) etc.
Any comments or queries will be highly appreciated.