Even in stocks, there are market and limit orders. For those that don’t understand, let’s help break it down. Essentially, a market order is when you are willing to buy or sell a currency at the exact price that the market is dictating, at whatever is currently available. It is essentially being ready to immediately trade, and can be compared to one-click shopping on the internet: you see it, you want it, you buy it. It might be a situation where you are confident in your trade strategy, or you have been waiting for the market to move a certain way, and finally found your opportunity. When you do this – this is called a market order. You are buying or selling at market price. This means that you are either purchasing at the market ask price, or selling at the market bid price.
Then, there are limit orders. Limit orders are placed at a different price than the market, because you feel as though you believe you order will be filled, whether it’s a buy price that is below the current market ask price or a sell price above the current market bid price.
Here’s an example. Let’s say that EUR/USD is currently trading at 1.205, and once it hits 1.208, you are positive that you want to go short, because you feel as though it won’t reach much higher, and that you can profit on its resulting declining value. Rather than sit and actually wait for it to hit that value in front of your screen (whether phone or laptop) – you can choose to put in a limit order to ensure that you can take advantage of the opportunity. This way, you can ensure that you sell before you believe the price will go down, and get the maximum profit possible.
Of course, the opposite situation can happen, and here, you might be considering a stop order. Let’s say that you see that GPB/USD is currently at 1.515, but there is a lot of resistance, and you are not sure if the market is going to push it upwards, although it is completely possible. You do believe that if it clears 1.52, then it will certainly push upwards, and rapidly. In this manner, you can place a stop order buy at 1.52, and this way, you only purchase if it pushes past this specific level, and take advantage of that upward movement. The order is not triggered if it does not reach that number, and you don’t have to sit and wait for it to happen. Instead, you can go and do something else, whatever it is – meet with family, friends, go back to work, or otherwise.
In not only the forex market – but any market – stop losses can truly save the investor countless amounts of money, and is a great way to manage risk. Stop losses are a way to do exactly what the name suggests – stop your losses. If you are concerned about a long position, it is a sell stop order, and if it is a short position it is a buy stop order. In this manner, if the trade goes the opposite way that you had planned, at least you will not end up losing massive amounts of money. There are certain traders who don’t like using stop losses because they understand volatility is part of the market, but many smart and conservative traders have used stop losses to ensure that their account is protected.
For example, if you chose to go long at GBP/USD at 1.52, but for whatever reason, the entire market is not showing much more upward strength – let’s say some relevant news came out – and the trade completely starts reversing – you can set a stop-loss sell order at 1.51. Now, you certainly will have lost money, as your theory was to go long at 1.52, and you sold at 1.51, but you obviously could have lost much MORE money without the stop losses. It is a solid way to protect capital, and used by millions of traders around the world.
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Trailing stops are interesting because they understand that a price is constantly fluctuating, and the idea is that if it fluctuates TOO much, your account should be protected. In this manner, if you execute a trade, go long, and the trade is going well – but suddenly everything is getting more volatile. Let us imagine that you already up and profiting by 100 pips, which of course means that you have a solid profit. However, rather than put an actual value for a stop loss – you decide to do a trailing stop. This means that no matter what, since you are already profiting, if the price goes down 20 pips, you still will have profited 80 pips.
If you short USD/JPY at 91.20, you might be pleasantly surprised to know that the price goes down to 90.20. Here, the trailing stop loss will be at 90.40, which means that once the order will be executed, you still will have profited, and simply protected yourself against too much risk and volatility.
Essentially, with trailing stops, you can choose an amount to “trail” your trade and safeguard it from losing too much money, which, of course, is the point of “stops”. This all depends on your style and strategy, but there are many traders who believe that trailing stops are a more accurate way to play the market than concrete stop losses.
Less common orders used in forex trading
The forex market still has other kinds of orders. Keep in mind that there are all sorts of traders and institutions that play the market different ways. For example, there are some traders who are willing to wait weeks to make a certain trade, while there are other people that are simply looking for opportunities to profit on the specific day, and then want to go home and forget about the market. Here are some other orders that are commonly used in the forex market.
This type of order stands for “good ‘till cancelled”. This means exactly what you might expect – your broker will not cancel the order until it is filled, or not filled. Time will tell whether you are able to execute the order or not.
This order means that you have an order in place for the day. If the order isn’t triggered at 12 PM, but the trade is GFD, it might be triggered an hour later, and you don’t even have to be around for the trade to have been executed. This usually means 5 pm EST, since the forex market is a global 24/7 market.
“One cancels the other” order is an interesting concept, where if one particular order is filled, then the other won’t be. This is great for determining support and resistance levels and for the experienced trader who believes that if the price hits one particular level, then there is no point in buying lower, or selling higher, because the trade will still work.
For example, if the EUR/USD price is 1.4, and you understand that there is a resistance level here, you might put in a buy order at 1.5, because you believe that if it reaches this level, it will run to 1.6, for example. However, earlier, you had placed an order to purchase at 1.2. Given that EUR/USD is already at 1.4, it seems unlikely that your order will fill at 1.2, because if it even dips to 1.3, there are many buys. In this manner, if EUR/USD is taken over 1.5, your new order is triggered, and your old 1.2 order is cancelled, because it is clear that this price occurring is very unlikely. In this manner, the advanced trader can truly strategize on a different level, thanks to OCO orders.
“One triggers the other” order is an additional strategy. Let’s use the same example, with the EUR/USD price at 1.4. Let’s say that you believe that if the price hits 1.5, then it will rush to 1.8. it might be that you expect some kind of global news that you are expecting. Either way, because you see the chance to profit immensely, you might decide that if it hits 1.5, you not only want to buy at 1.5, but you want to buy at 1.55, as well. You might do this because you are busy that day, but still want to profit off of the big move to 1.8.
In this way, one trade occurring triggers the other, and you will be able to buy at both levels, which could end up working out well for you.
Keep your orders clean and sharp
Ultimately, unless you are a veteran trader with a tried-and-true strategy, you will want to keep it simple until you truly learn and understand the market, and are able to adapt accordingly.
You have to ensure that you are comfortable with your order entry before you execute a trade. This is essential to ensure that you don’t make a mistake. For beginner traders, it is important to remember that you have to concentrate and ensure that you don’t make any mistakes with regards to your order.