Trading Strategy: How to Take Advantage of the Different Types of Forex Orders
Modern forex brokers offer a variety of different order types that are specifically designed to let you set various limits and conditions for your trades, so you can help safeguard yourself should the worst happen and the market moves against you.
New traders should take some time to understand how each type of order works in practice — and, ultimately, which ones are best suited to their own trading style and overall strategy.
Here are a few of the most common order types to keep in your arsenal:
Market Order
Market orders are the most common and straightforward type of forex order — they are executed instantly using the best spot/market price available at that moment in time, immediately becoming an open position and therefore vulnerable to fluctuations in the wider market.
These orders are best utilised for ‘easy wins’ at times when the market conditions seem ideal. However, if the value of the security goes down, you effectively lose money unless you wait until the market bounces back; any losses are unrealised in real terms until the order is finally closed.
Market orders are the primary order type used by day traders and ‘scalpers’ — those speculators who buy and sell small amounts of currency frequently throughout the day to capitalise on slight fluctuations in value — due to their convenient, quick-fire nature and the lack of additional considerations required.
Limit Order
Limit orders are orders that allow you to register your intention to either buy or sell an instrument, but only once certain conditions specified within the agreement have been met; your order is pending up until this time, and as such your account totals or margin balance won’t be affected until it’s been executed.
Traders typically use these orders to set up a purchase that only comes into effect once the market price crosses their desired threshold. For example, you could set a limit order to wait for a better entry price for your currency of choice — e.g. if USD/CAD is at 1.3130 but you think it’ll decrease further and would prefer to wait until it hits 1.3050.
Conversely, if you’re looking to sell, limit orders also enable you to hang on to your securities until the market has gained more upward momentum.
This allows you to only act when you’re fairly confident you’ll benefit, which naturally reduces the risk of the investment and protects you against sudden price fluctuations — however, if the market swings in your favour (but not quite to your specified level) there is a chance you could miss your chance to capitalise on a still-profitable window of opportunity.
Further reading: https://fxssi.com/limit-order-vs-stop-order-difference
Take Profit Order
Unlike the two above order types, which are centred around the conditions for entering into a trade, take profit orders are more concerned about the other end of the process — namely, your exit strategy for closing your position.
Take profit orders automatically close an open position once the exchange rate reaches a user-specified value, allowing you to cash out at opportune moments and essentially ‘lock-in’ your profit.
For example, if you’re going long on EUR/USD at 1.1115 and wish to close the position as soon as the exchange rate next hits 1.1200 to ensure you make money, you could set your ‘take profit rate’ accordingly so you don’t miss the boat.
Once the bid price touches the chosen limit, the position is closed at the current market rate. Nevertheless, in especially fast-moving market environments, there could be a gap (and therefore a small discrepancy) between the rate you originally entered and the true rate at the time of closing; this is an occupational hazard known as ‘slippage’, which unfortunately rarely works in a trader’s favour and will invariably be a less competitive price — so bear that in mind!
Stop Loss Order
Ostensibly fulfilling the opposite function of the previous type, stop loss orders are used to automatically close an open position if and when the exchange rate drops to a certain level.
These orders are a particularly useful tool for investors as they effectively protect you from incurring any further losses should the trade you entered into prove unprofitable! You can also use them regardless of whether you’re buying or selling; if you’re currently in a long position they’re effectively a ‘sell stop’ order, while if you’re in a short position, they function as a ‘buy stop’ order.
For instance, if you’re going long on AUD/USD at 0.685, you could set 0.65 as your stop loss rate to allow you to withdraw from the trade should the market start to move against you. This also gives you the advantage of not having to be glued to your trading chart screen for fear of losing money — you can simply set the maximum financial loss you’re willing to tolerate and go on about your business!
Despite this, it’s important to note that stop loss orders aren’t able to prevent losses entirely, they can only mitigate them. Additionally, because your order is always closed on cue, it means you won’t benefit from any subsequent market reversal back to profitability — which you may have done if you’d have chosen to play the long game and stick it out a bit longer.
All positions are closed at the current market rate, but again at fast-moving times there could be slippage, meaning you lose more of your margin as the value drops further in the interim.
Further reading: https://www.investopedia.com/ask/answers/06/forexlimitandstop.asp
Trailing Stop Order
Trailing stop orders are primarily relied upon to restrict losses and avoid margin closeouts; these orders are comparable to stop loss orders as they are designed to close your position if the market moves in an unfavourable direction by a user-specified distance.
The key difference with trailing stop orders, though, is that the lower trigger limit isn’t fixed and instead moves with the market — your stop limit is effectively set at a certain distance away from the current market price (known as the ‘trailing step’) as opposed being given a fixed figure.
Practically speaking, this means that if the value of the instrument increases, the lower stopping limit will move upwards along with it automatically, trailing behind by a specified interval.
On the other hand, if your chosen security should depreciate in value, the original stop limit will remain unchanged until it is reached, at which point your position will be closed as arranged. This allows your position to accrue value whilst simultaneously minimising your account’s vulnerability to relative losses!
Further reading: https://www.schwab.com/resource-center/insights/content/trailing-stop-orders-mastering-order-types
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The content contained herein does not construe any form of advice and the user must not take this as such. We do not accept any liability for the direct or indirect usage of the content held in this article. We strongly advise that you obtain independent financial, legal and tax advice before proceeding with any currency or spot metals trades