When you place orders with a forex broker, it is extremely important that you know how to place them appropriately. Like the stock market, there are numerous different order types that can be used to control your trade and improper use of order types can adversely affect your entry and exit points. Orders should be placed according to how you are going to trade - that is, how you intend to enter and exit the market. In this article, we'll cover some of the most common forex order types. (For the latest news on currencies, check out Currency Market News at Forbes.com.)

Market Order

This is the simplest and most common type of forex order. A market order is used when you want to execute an order at the current price immediately. If you are buying, a market order would execute the trade at the current ask price and if you are selling, the market order would execute at the bid price. (For more insight, see The Basics Of Order Entry and Understanding Order Execution.)

Limit Order

A limit order is an order instruction to buy or sell a currency at a specified limit price. 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 or lower once the market reaches your specified 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, and it is higher than the current market price. Limit orders simply limit the maximum price you're willing to pay when buying or limit the minimum price you're willing to accept when selling.

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. The difference between a limit order in this instance and a stop-loss order is the limit-sell order will be placed above the current price, whereas the stop-loss order is placed below the market price.

As an example of a limit-buy order, suppose you want to purchase the currency pair USD/CAD. The bid/ask price is currently 1.3475/1.3480. If you place a limit order to buy at 1.3450, you are essentially saying, "I will only buy currency if the ask price falls to 1.3450 or lower, otherwise I won't buy the currency."

Similarly with a limit order to sell, if the limit order to sell was at 1.3490, this means the sell order would only be executed if the USD/CAD currency goes up to at least 1.3490 from its current 1.3475.

Stop Order

A stop order is an order that becomes a market order once the price you specified is reached; they are normally used to limit potential losses. Stop orders can be used to either enter a new position or to exit an existing one automatically. If using a stop order to enter into a position, it is called a buy-stop order and gives instruction to buy a currency pair at the market price once the market reaches your specified price or higher, which is higher than the current market price. If using a stop order to exit a trade, it is called a sell-stop order and gives instruction to sell the currency pair at the market price once the market reaches your specified price or lower, which is lower than the current market price. Some common ways stop orders are used are listed below:

  1. Stop orders are commonly used to enter a market when you trade breakouts.
    For example, suppose that the USD/CHF is trading in a tight range, and based on your analysis, you think it will trend higher if it breaks through a certain resistance level. So instead of sitting at your computer waiting for the price to hit the resistance level and hitting buy, you can enter a buy-stop order that will execute a market order for the currency pair once it hits that resistance level. If the actual price later reaches or surpasses your specified price, this will open your long position.
  2. Stop orders are used to limit your losses.
    Before you even enter a trade, you should already have an idea of where you are going to exit your position or how much you are willing to lose. One of the most effective and popular ways of limiting your losses is through a pre-determined stop order, or stop-loss.

    If you had bought the pair USD/CHF, you were hoping its value would increase. But if the market turns against you, you should set stop loss orders in order to control your potential losses. By entering a stop-loss order, you are giving instructions to automatically close your long position in USD/CHF if the price falls below a certain level.

  3. Stop orders can be used to protect profits.
    Alternatively, instead of using a stop order to just limit your losses, you can also use it to exit a profitable position in order to protect some of the profit. For a long position if your trade has become profitable, you could keep moving the price of your stop-loss order upwards to protect some profit. 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.(To read more about setting stops, see Stop Hunting With The Big Players.)

Other Order Types

In addition to the common order types discussed above, there are additional components of an order entry that govern how long you order stays open that you should know.

Good for the day (GFD)

A good for the day order is exactly like it sounds: it remains open until the trading day ends. Because the Forex market is a 24 hrs market, you may need to check with your broker to find out exactly when the cutoff time is. Usually, if you're in the United States, a GFD order would become inactive at 5pm EST.

Good until cancelled (GTC)

A good until cancelled order is an order that remains active until you manually cancel it. If using several GTC orders, it is usually a good idea to keep track of each GTC order you have because the broker will not cancel any of these orders for you.

Order cancels other (OCO)

An OCO is an order that is a combination of two limit orders and/or stop orders. The orders are placed below and above the current market price and if one of the orders is executed, the other one is automatically cancelled. For example, suppose the currency price of the USD/CAD pair is 1.3500. A trader with an OCO order could have an order to buy at 1.3505, because maybe he is anticipating a breakout. And the same trader could have an order that instructs the broker to sell the currency if the price falls to 1.3495. If for instance the buy order gets executed because the price reaches 1.3505, the order to sell would be cancelled.

Execute the Correct Orders

Having a firm understanding of the different types of orders will enable you to use the right tools to achieve your intentions. While there may be other types of orders, market, stop and limit orders are the most common and usually the only ones traders need. Be comfortable using them because improper execution of orders can cost you money. Some brokers can also label these types of orders differently so be sure you fully understand the trade types before you start trading. In the next section we'll discuss brokers and setting up your account.

Types of Forex Accounts

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