Basic Types Of Orders In Forex Trading
For trading Forex, the first step is to open a live trading account with a Forex broker. Once you open the account, you’ll allocate funds into a trading account and begin trading. You can choose from a variety of trading platforms such as Metatrader 4, Metatrader 5, and cTrader, to start trading. However, before you start an actual trade, you must familiarise yourself with some basic knowledge of the market.
One of the essential things you should know before you start trading is the basic order types that are used in forex trading. During the day, positions are squared off within the trading session or carried forward. The delivery is either taken or the position is carried forward – futures and options.
There are several types of orders you can use while trading. The most common types of orders are market orders, limit orders, and stop-loss orders. Let us discuss them in detail:
This is the simplest of orders. It is a trading order to sell or buy at the best possible price in the current market. So, if the order to buy or sell is initiated, the system will execute the orders with the best prices available in the market. Another feature of a market order is that it is implemented almost immediately. In this type of order, a trader or investor does not have any control over the price. However, despite that, the probability of order execution is very high.
It is important to remember that there could be a slight variation in the prices we see on screen and the prices at which an order is executed. This is because the price displayed is the price of the last transaction, which need not be your transaction.
A price difference can also occur due to slippage. It means you might get a different price because of the high volatility in prices.
A limit order is an order where the trader can set a price to buy or sell. In contrast to the market order where the trader has no control over price, in a limit order, the trader sets the price. A limit buy order executes at order prices or below and a sell order executes at order price or higher. For instance, if a trader places a limit order for purchase at $100, the stock will be bought for $100 or lower. Likewise, if a limit order to sell is set at $100, the stock will be sold at $100 or higher.
A limit order can be a handy tool to control the purchase and sale prices during high volatility. It is also useful for the traders not actively following price movements but who wish to buy or sell at a pre-determined price. A limit order can be left open with an expiration date.
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A stop-loss order is an order where the trader can limit losses by exiting a trade when a specific price is reached. By setting up a stop-loss order, the traders protect themselves from incurring high losses when the price goes against them.
A trader places a buy order expecting the price to rise and to earn a profit from that rise. But the price may start falling instead of rising. In such a situation, a stop-loss order can help the trader to avoid high losses by placing it below the buy price.
Suppose a trader placed a buy order at $500 and placed a stop loss at $498. If the price goes up, the trader can earn a profit. However, if it falls below $500 to, say $495, the trader will suffer a loss of $5 per share. However, since a stop-loss order was placed at $498, the trade was exited at that price resulting in a loss of just $2 per share.
A Stop-loss order can also be placed where the trader is looking to sell. In such a case, the trader expects the price to fall. But instead, it goes up. So, to avoid high losses when prices fall from a new high, a stop order is placed.
In the stop-loss order, trades are set with a trigger price. If a buy trade is placed and the price falls, hitting the trigger, it will exit at any price available in the market. The higher the price volatility, the larger the loss.
Stop-loss Limit Order
This is similar to stop-loss orders but varies from it in the aspect that it does not get executed at market price. Stop-loss limit orders are executed at the specified limit price set by the trader. The trader will have to set a trigger price and a limit price.
After Market Order (AMO)
The usual market hours are 9.30 AM to 4.00 PM. After-market orders are placed beyond market hours. However, the entire period outside market hours can’t be used to place these orders. Brokers specify a time interval within which the AMOS can be placed. Furthermore, there are conditions on the security price you can place in limit orders. The normal limit is in the range of 5-10% of the adjusted closing price. However, the actual range varies from broker to broker.
AMOs can be set at market price.
Bracket Order (BO)
This is a type of order where three orders are bundled into one. You enter a new position with a target and a stop-loss. Every bracket orders are limited orders. The stop-loss and target must be in absolute points. For every bracket order that is executed, two corresponding orders will be placed automatically – a target order and a stop-loss order.
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This is a type of order to enter a position along with a stop-loss in the same order form. There are several types of cover orders based on time duration. It can be a:
- Good For Day Order – where the order is valid till the end of the current trading session
- Good Till Day Order – where the order can be kept active for a few days
In the case of good till day order, if the order is placed on a particular day and is not executed on the same day, it will be carried forward to a specific day as mentioned in the order. If it is not executed by then, it will be cancelled.
- Immediate or Cancel Order – such orders are executed immediately & if not executed, they will automatically cancel. Chances of partial execution are there in this type of order.
This is another order that aims to protect profits automatically and is placed in an open position. Such an order is entered with a stop parameter that generates a moving or trailing activation price. The stop parameter is put in as an actual specific amount of rising (or falling) security prices.
For instance, a stop-loss order of say, 50 pips from the actual price will be triggered and follows the price, profiting from a parameter of 50 pips set. But the stop-loss order will remain unchanged if the profitability of the position falls. It will thus reach the stop-loss order and close the position to secure the current profit.
This order works opposite to the stop-loss order because this order automatically closes position once it reaches a certain level of profit. Take-profit order remains in effect until the price reaches the set order or until the order is cancelled. It can be placed as ‘open position’ and ‘pending order’.
Buy Stop Order
This order is entered at a stop price above the current market price. Traders use a buy-stop order to limit a loss or to protect a profit from a stock they have sold short. A sell stop order is entered at a stop price lower than the current market price. Traders use a sell-stop order to limit a loss or to protect the profit on a stock they own.
Traders use a market order to enter or exit a position quickly as it is the quickest way to fill an order. But it offers the least control over the price. Conversely, a limit order ensures minimum selling prices and maximum buying prices. However, the downside is it can’t be executed as quickly. Stop orders limit your losses with a market order if a trade turns against you. Stop-limit orders use the same tactics, but limit orders instead of market orders.
The type of order to use depends on your trading plan and strategy. However, a trader will have to use one or a combination of few orders to ensure successful trading. Different types of orders are suited for different situations and purposes. A wise trader recognises which type of order should be placed in a particular situation. Placed wisely, the orders can help you succeed in all forms of trading.
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