Imagine walking into a supermarket, picking up a loaf of bread and when you checkout telling the cashier that you are only willing to pay 88 cents for it. When the cashier looks at you like your crazy, you tell them you don’t need the bread until Monday and to just let you know if it reaches 88 cents by then.
Sounds a little weird? Well Forex brokers allow you to place trades in a manner similar to this. Don’t worry, they also allow you to just buy something right away like you’re currently used to doing.
Placing an order for a particular currency trade is how you enter or exit a trade or position. Entering a position is an elaborate way of saying that you are buying a currency pair. Exiting a position is an equally fancy way of expressing your intention to sell a currency pair.
You probably thought the buying and selling part of Forex would be fairly straightforward, but several types of orders exist which are intended to help you maximize your profits and limit losses. Let’s now examine these types of orders.
A market order is an order to buy or sell a specific currency immediately at the current exchange rate quoted by your broker. Typically market orders can be executed in a matter of seconds and are executed at the price you saw on your screen went you requested to buy or sell a currency pair.
Trading platforms carry out trades in different manners, but often make it very easy to perform a market order trade. Opening or closing a position is often as easy as clicking on the price displayed for a currency trade and having the money either subtracted or added to your account depending on the result of the trade.
There are three main types of limit orders which are typically referred to as Entry, Stop, and Limit (traditional limit) orders. These types of orders enable you to have more control over the buying and selling price of the currency pairs which you are trading.
Entry orders are a kind of Forex request that are placed with the intention of opening a new position at a particular price. You can specify the price at which you would like to purchase a particular currency pair and then these orders remain active until you cancel the existing order or the specified price is achieved and the trade executes.
This type of order is useful for traders to guarantee you receive the desired purchase price for a specific currency pair. Remember the grocery store example at the beginning of this article – Imagine if you could go to your favorite store and tell the clerk exactly what price you are willing to pay for all of your favorite products and the clerk agrees to automatically purchase the product for you once it reaches that price and deliver it to your house. No more standing in line for after Thanksgiving sales!
Entry orders give you more control over the price which you pay to purchase currency at. Since the success of a Forex trader relies heavily on the ability to manage very small price changes, an entry order is a very useful tool.
A stop order is a kind of limit order linked to an open position with the intention of stopping additional losses if a price reaches a pre-defined point beyond the purchase price. As with market orders and entry orders, stop orders remains in effect until the position is liquidated or is cancel.
Stop orders (sometimes referred to as stop-losses) are incredibly useful for Forex traders who would like to limit the amount of losses incurred on a particular trade. Additionally, a stop can be used to secure a profit once a particular favorable price is reached on an open position so that if a currency pair’s price starts to slip again you will still sell your currency at a profit.
A traditional limit order is similar to entry and stop orders, but is designed to specify at what level you would like to take your profit. If you are going long on a position a limit order would be set at a price above the purchase price. Conversely, if you are shorting a position then the limit order would be placed at a price below the purchase price.
Duration of Orders
Orders typically last until the stated purpose of the order has been accomplished. Market orders are always executed at the time a transaction is requested; however, limit (entry, stop, and limit) orders can be placed for with a specified duration.
The default for a transaction is to remain active until executed, but some Forex brokers will allow you to specify the following designations for a currency trade:
- GTC (Good ‘Til Canceled)
An order to buy or sell at a specified price. This order remains open until filled or until the Forex trader cancels.
- GFD (Good For the Day)
A GFD order remains active in the market until the end of the trading day. Since foreign exchange is an ongoing market the end of day must be a set hour which is typically published by the Forex broker you are dealing with.
- OCO (Order Cancels Other)
An OCO order is a mixture of 2 limit and/or stop/entry orders. 2 orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is cancelled. This allows you to open contrary positions and then go with the one that initially holds true.
Paper or Plastic?
Market and Limit (entry, stop, and traditional limit) are usually sufficient for most traders. Designing your initial strategy by utilizing these types of orders will give you more flexibility and allow you to spend more time with your kids since you won’t be hunched over your computer screen all day waiting to click the mouse at the precise moment to maximize your profits.