Introduction to Forex Orders
There are different forex orders that traders can use in the forex markets. Each of these orders has its peculiarities and should only be used in certain situations and under certain conditions. The forex order process is as important as any forex trading strategy, as using the wrong forex order a certain condition can destroy the trade before it even takes off.
The nomenclature and order placement procedure for some of these forex orders differ from one trading platform to another. The MetaTrader4r platform, which is the commonest platform used by retail traders in the forex market today, has a very simplified forex order process that every trader can understand. Other proprietary trading platforms like Actforex (used by Ava Financial Limited) and Currenex retail forex trading platform, are more complex and will need some getting used to. By the time the trader moves on to the more professional institutional Level II forex trading platforms, the complexity of forex orders placement increases. Understanding these differences is key to understanding how to place forex orders correctly during the trading process.
Types of forex orders
There are two, main types of forex orders:
1. Instant (market) order
2. Pending orders
Instant orders, also known as market orders, are forex orders that are executed at the prevailing market prices. They are not delayed orders. Examples of forex orders that constitute market orders are:
(a) Market Buy
(b) Market Sell
(c) Stop Loss
(d) Take Profit
(e) Trailing Stop
The Market Buy is an instruction to the broken or dealer to initiate a long position on a particular currency asset at the prevailing market price. It is used by the trader with an expectation to gain from rising prices.
– The Market Sell is an instruction to the dealer or broken to initiate a short position on the currency asset at market price with an expectation to profit from falling prices.
– The Stop Loss is an instruction to the broker to automatically close an active position if the asset price has moved contrary to the trader’s position by a specified member of pips. It is used as an account preservation strategy to safeguard a trader’s account from steep losses.
– The Take Profit order is an instruction to the dealer/broker to automatically close an active position which has moved in the trader’s favour by a specified number of pips. It is used as an account protection strategy as this order type aims to lock in profits from the trade before the position reverses.
– The Trailing Stop is another forex order type used as an account protection strategy. It works by adjusting the stop loss position to chase advancing prices when the trader is in profits, thus locking in profits. When prices start to retreat, the trailing stop assumes a stationary position, and if the market price hits the trailing stop, an instruction is sent to the broker to close the position automatically. If the retreating price does not touch the trailing stop before resuming the advance, the trailing stop will continue the chase of the advancing prices.
In using the stop loss, take profit and trailing stops, the trader is bestowed with the right to choose an appropriate price level with which to set these positions.
The pending orders we have in the forex market are as follows:
(a) Limit orders
(b) Stop orders
(c) OCO orders (One Cancels the Other)
These are orders that are used when there is an expectation that the price of the currency asset will reverse when they get to a certain key level. Limited orders have a buy and sell component. A buy limit is used when there is an expectation that the price of the asset will drop before advancing in the opposite direction. A trader will therefore use a buy limit order if he expects the currency asset to retreat to a level of support before advancing. The entry price for a buy limit is therefore set at a point where there is reasonable price support. In the same vein, a trader will use a sell limit order, setting the entry price at a reasonable level of resistance if he expects the price of the currency asset to advance to such a resistance level and the pull back. You can learn more about limit orders with trade examples here.
These are orders that are used when the trader wants a confirmation that price of the asset will breach a key level of support or resistance, and continue in the same direction of upward advance (buy stop) or downward advance (sell stop). In this case, the entry price is set beyond the key levels of support (sell stop) or resistance (buy stop). The advance price of the asset will trigger the trade entry on its way. Traders must be careful when using the stop orders. They must confirm that prices have truly broken the key levels and not just touched it. This is confirmed if the candlestick in view closes beyond the key levels, indicating a true price break. You can learn more about stop-loss orders and common mistakes when placing them here.