When trading with a forex broker, it is extremely important to know how to place orders correctly. Orders should be placed according to how you are going to trade—that is, how you intend to enter and exit the market. Improper order placement can skew your entry and exit points. In this article, we'll cover the most common forex order types.
This is the most common order type. Use a market order when you want to execute a trade immediately at market price, which is either the displayed bid price or ask on your screen. You may use a market order to enter a new position (buy or sell) or to exit an existing position (buy or sell).
A stop order is executed once a specified price is reached. It can be used to enter a new position or exit an existing one. A buy-stop order is an instruction to buy a currency pair at a market price once your specified price or higher is reached. The buy price needs to be higher than the current market price. A sell stop order does the opposite. It is an instruction to sell a currency pair at market price once your specified price or lower is reached. The sell price needs to be lower than the current market price.
Using Stop Orders
Stop orders are commonly used to trade breakouts. For example, suppose a currency pair is rallying toward a resistance level. Based on your analysis, you think a breakout above resistance will propel the pair higher. To trade this opinion, you can place a stop-buy order a few pips above the resistance level to trade the potential upside breakout. If the price reaches or surpasses your specified price, this will open your long position.
An entry stop order can also be used to trade a downside breakout. Place a stop-sell order a few pips below the support level, so that when the price reaches your specified price or falls below it, your short position will be opened.
Stop orders are used to limit losses. Everyone has losses, but what really affects the bottom line is the size of your losses and how you manage them. Before you enter a trade, you should have an idea of where you want to exit your position should the market turn against you. One of the most effective ways of limiting your losses is via a pre-determined stop order, commonly referred to as a stop-loss.
If you have a long position on, say the USD/CHF, you will want the pair to rise in value. In order to avoid possible uncontrolled losses, you can place a stop-sell order at a certain price so your position will automatically be closed when that price is reached. A short position will have a stop-buy order instead.
Stop orders can be used to protect profits. Once your trade becomes profitable, you may shift your stop-loss order in the profitable direction to protect some of your profit. For a long position that has become very profitable, you may move your stop-sell order from the loss to the profit zone to safeguard against the chance of realizing a loss in case your trade does not reach your specified profit objective, and the market turns against your trade. Similarly, for a short position that has become very profitable, you may move your stop-buy order from loss to the profit zone in order to protect your gain.
A limit order is placed when you are only willing to enter a new position or to exit a current position at a specific price or better. The order will only be filled if the market trades at that price or better. A limit-buy order is an instruction to buy the currency pair at the market price once the market reaches your specified price or lower. That price must be lower than the 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 or higher. That price must be higher than the current market price.
Types of Limit Orders
Limit orders are commonly used to fade breakouts. You fade a breakout when you don't expect the currency price to break successfully past a resistance or a support level. In other words, you expect that the currency price will bounce off the resistance to go lower or bounce off the support to go higher.
For example: suppose you think that a rally in USD/CHF is unlikely to successfully break past resistance. Therefore, you think it would be a good opportunity to short when USD/CHF rallies to near resistance. To take advantage of this theory, you can place a limit-sell order a few pips below that resistance level so that your short order will be filled when the market moves up to that specified price or higher.
Besides using the limit order to short near resistance, you can also use this order to go long near a support level. For instance, if you think there is a high probability that a decline in USD/CHF will pause and reverse near a particular support level, you may want to take the opportunity to go long when USD/CHF declines to a level near that support. In this case, you can place a limit-buy order a few pips above that support level, so that your long order will be filled when the market falls to that specified price or lower.
Limit orders are used to set your profit objective. Before placing your trade, you should already have an idea of where you want to take profits should the trade go your way. A limit order allows you to exit the market at your pre-set profit objective. If you long a currency pair, you will use the limit-sell order to place your profit objective. If you go short, the limit-buy order should be used to place your profit objective. Note that these orders will only accept prices in the profitable zone.
Execute the Correct Orders
Having a firm understanding of order types will enable you to use the right tools to achieve your intentions: how you want to enter the market (trade or fade), and how you are going to exit the market (profit and loss). While there may be other types of orders, market, stop and limit orders are the most common. Be comfortable using these orders, because improper execution of orders can cost you money.