As a forex trader you have recourse to different types of orders in
order to enter and exit the forex markets. These different types of
orders allow you to specify precisely as to how your broker should
fulfill your forex trades. This article explains the different order
types that are possible in forex trading and emphasizes the fact that it
is important that you place orders with a forex broker in the right
way.
Market Order
A Market order is one of the most common types of orders executed in the forex spot market.
A Market order is an order to buy or sell a currency at the best
available current market price. In other words, in a market order you
buy as per current Ask price and if you are selling it would be as per
current Bid price. This is the rule and not a choice or exception. These
types of orders can be used to enter a new position (buy or sell) or to
exit an existing position (buy or sell).
Currency prices always keep changing with the bid and ask prices
often fluctuating considerably. So a market order may not get executed
at the last traded price. If the order does not get executed at the last
traded price, the broker will usually requote and the trader on his
part has to reconfirm the price for the market order to become
effective. Generally market orders are favored over other orders with
respect to more stable currencies such as EUR/USD.
Slippage
All forex orders including market orders are susceptible to what is
called as slippage. Slippage can be defined as the difference between
the expected fill price and the actual fill price. Assume you place a
market order to buy Euro at $1.3535 (expected fill price). But in
reality by the time your order would have actually got filled in or
executed, the rate would have moved to say $1.3537 which means there is a
difference of $0.0002 (called slippage). This may or may not happen.
But the fact is, this often happens even with the best of automatic
trading software. Slippage is also referred to as bad fill and generally
occurs during volatile market conditions as for instance during
economic news releases.
You could say that slippage corresponds to what happens during the
few seconds that could elapse between the time of giving the market
order command (whether buy or sell) and the actual time when the
transaction gets executed (when your order gets filled).
Limit Order
A limit order is an order placed to buy or sell currency only at a
particular price and no other price. Just like a market order, a limit
order is also executed at the forex spot market. But the difference with
the limit order is that the transaction would take place only if the
traded currency reaches the limit set by you before you bought or sold.
In other words a limit order helps you to limit the maximum price you
pay when you buy a foreign currency or limit the minimum price when you
sell a currency. So a limit order protects you, in that you don’t buy a
currency for a higher price and don’t sell a currency below a minimum
price.
Depending on the direction of the position, limit orders can be either limit-buy order or limit- sell order.
Limit-buy order
A limit-buy order is an instruction to buy the currency pair at the
market price if the market reaches your specified price or lower. The
limit-buy order price level is always set below the current market
price.
Take a look at the following example and learn how to set limit
orders when buying a currency? - Assume you want to buy 1 standard lots
of EUR/USD. The current bid/ask price on your screen is say 1.3535/38.
Then you click on the ask price tab and buy 1 lot of EUR/USD, and then
assume you set a limit of 1.3536. This means that unless the ask price
is lowered from the current 1.3538 to 1.3536, this transaction will not
be executed. So it helps you limit the maximum price you pay when you
buy a currency. In this transaction before you place the limit order you
have got to reiterate or reaffirm to yourself that you want to buy the
currency only if the price were no higher than what you were willing to
pay.
As you can see from the above example, the limit order can be used to
enter trades. Just set the entry price and the trade will be entered
only at that price and no other price.
Limit-sell order
A limit-sell order is an instruction to sell the currency pair at the
market price if the market reaches your specified price or higher. Note
that the limit-sell order price level is always set above the current
market price.
How to set a limit order when selling a currency? – Consider the same
EUR/USD example as above. The current bid/ask price on your screen is
the same 1.3535/38. In this case you may set a limit order on the bid
price for 1.3537 which means you will sell the EUR/USD currency only if
it rises to at least 1.3537. So this limit order protects you in that
you don’t sell a currency below a minimum price.
As you can see from the above example, the limit order can be used to
exit trades making a profit. The sequence is, first deciding your
profit set your exit price, and then the trade gets executed only at
that price and no other price.
There is a key point to be reckoned with when placing limit orders.
For example it is possible that your order may never get executed as the
currency price may not reach your set limit order levels. Nevertheless
these types of orders are definitely beneficial as when the trade goes
through you get the specified purchase or sell price.
To sum up a limit-buy order is an instruction to buy the currency
pair at the market price once the market reaches your specified price
(lower than current market price). A limit-sell order is an instruction
to sell the currency pair at the market price once the market reaches
your specified price (higher than the current market price). So limit
orders have more to do with profits only.
Stop Order
Now let’s talk of another type of order known as stop orders. A Stop
Order (could be either a Sell or Buy Stop Order) which is not executed
by your trading platform until the market price has reached your defined
price. In other words, a stop order for a currency pair will be
executed only when the currency you want to buy or sell reaches a
particular price referred to as the stop price. No sooner the currency
reaches this price a stop order in effect becomes a market order and
gets executed.
The Sell and Buy Stop order is reverse to the Sell and Buy Limit
Order. The Sell Stop Order is Always set below the current market price,
while the Buy Stop Order is Always set above the current market price.
When the market reaches these stipulated prices, it executes and becomes
a market order.
Example of Buy Stop order
Assume you expect EUR/USD, which is now at 1.3535 to go up in the
next few hours (because of vital economic news releases), but you are
unable to keep watch at the trading platform. So what do you do? Set a
Buy Stop order and set it at 1.3570. If the market price hits the price,
set by you to buy it becomes a market order and execute the deal.
A stop order may be disadvantageous in that it is not guaranteed to
be filled at the preferred price you want. Once the stop order gets
triggered, it turns into a market order that is filled at the best
possible price. Often this price may be lower than the price specified
by the stop order.
Stop-loss order
A stop-loss order is akin to a limit order, but importantly it is
linked to an open trade and prevents losses should the price go against
you. A stop-loss order remains effective until executed or cancelled.
Supposing you buy EUR/USD at 1.3535. Therefore, when, you set a
stop-loss order at 1.3525 you are limiting your maximum loss. In other
words if your calculation went wrong and EUR/USD drops to 1.3525
instead of moving up, the stop loss order will be automatically executed
at 1.3525 and close the position for a 10 pip loss. This means you do
not have to sit in front of the computer in order to monitor price
levels and prevent losses from occurring. Similarly, a stop-loss order
can be set on any open position.
Summary of Limit and Stop Orders
Let’s summarize the salient points of Buy Stop Order and Buy Limit Order,
Sell Stop Order, and Sell Limit Order,
Stop orders are where the entry price (buy or sell) is set and is
also how we limit our losses. Sell Stop order is set below the market
price. Buy Stop order is set above the market price.
Sell Limit orders is set above the market price. However Buy Limit order is set below the market price
One Cancels the Other (OCO) orders are essentially a combination of
two limit and/or stop-loss orders placed above and below the current
market price. But significantly when one order gets executed the other
order gets automatically cancelled.
Consider this example.
Assume that the price of EUR/USD is 1.3535. You decide to either buy
say over resistance level at 1.3585 or initiate a selling position if
the price falls below to say1.3500. In this OCO Order if 1.3585 is
reached, the buy order will be executed and the 1.3500 sell order gets
automatically canceled.
So OCO order is a situation when a limit order and a stop-loss order
exist at the same time. If any one order is executed the other gets
automatically cancelled.
This precludes the necessity for you to continually monitor your currency position in the market
The above are the basic orders types available in most of the trading
systems. Understanding the different types of orders will empower you
with the right tools to achieve your intentions - how you want to enter
the market, and how you are going to exit the market. While there may be
other types of orders, market, stop and limit orders are the most
common of them all. Largely finding the right type of trading software
will also have a major role to play in placing forex trading orders.
