UNIT A| Absolute Essentials

4. Types Of Orders

To complete your view on the trading mechanics, let's cover the different order types that allow you to enter, exit and program trades. There is a wide choice of orders designed for all types of trading styles.

 

Market Order

Orders that are executed immediately at current rates are known as market orders. For example, suppose GBP/USD is currently traded at 1.5842; if you wanted to go long at this exact price, you would click buy and your trading platform would instantly execute a buy order at that exact price.

When closing a position manually, the trader is also technically executing a market order of the same amount in the opposite direction of the open trade. To close a long GBP/USD position, the trader only has to go short the same size than the long position. This is also called an offsetting or liquidating transaction.

Entry stop order

An entry stop order is an order you can preset into the platform to buy or sell at a specified price. Supposing EUR/USD is currently traded at 1.1014. and you want to buy if the price reaches 1.1100. You can either monitor the exchange rate and enter a market order manually if it reaches that price level, or program an entry stop order at 1.1100. If the price goes up to that level, your trading platform will automatically execute a buy order at that price.
The entry stop price on a buy order must be above the current ask (offer) and on a sell order it must be below the current bid. Note that not all broker-dealers guarantee you an execution at or near the stop price.

Sometimes entry orders contain a second variable: time duration. Besides the price at which you wish to buy or sell a certain currency pair, you can also specify how long the order shall remain valid.

Limit Order

It's an order to buy or to sell at a specified price executed at the limit price or at a better price than the market price. A sell limit order can only be executed at the limit price or higher, and a buy limit order can only be executed at the limit price or lower. Note that a limit order can possibly not be executed because the market price may quickly surpass the limit price before your order can be filled. This type of order is used as a protection from buying the currency at a too high price or selling at a too low price.

Stop Loss Order

A stop loss order is a limit order preset to close out a position automatically when the bid or offer price touches a given level with the purpose of preventing additional losses if price goes against you. In a long position the stop loss will be set below the spread, and in a short position above the spread.

A stop loss order remains active until the position is liquidated or you cancel the stop loss order. For example, if you go short USD/JPY at 107.00 you can limit your maximum loss by presetting a stop loss order at 108.00. This means if the exchange rate moves up by 100 pips, your trading platform would automatically execute a buy order at 108.00 and close out your position for a 100 pip loss.

If you have a long position instead, you may issue a stop loss order below the current exchange rate. If the market price falls through the stop loss trigger price, then the order will be activated and your long position will be automatically closed out.

Like limit losses, stop losses are useful if you don't want to sit in front of your trading platform all day. They also prevent you from losing more than what you intended to in the case the Internet connection fails or if you simply fall asleep.

Margin calls, as discussed before, can be effectively avoided by monitoring your account balance on a very regular basis and by utilizing stop-loss orders on every open position to limit risk.

Below follow the main order execution mechanisms used in Forex trading:

Trailing Stop Loss

A trailing stop loss is a stop loss order that is linked to a position like any stop loss, but instead of being fixed at a certain price level, it has the capability to move as the position moves into profit. By raising the stop loss trigger price, partial gains on the position are locked in.

Take Profits Order (TPO)

The opposite of a stop loss (i.e. a stop gain). The TPO order specifies that a position should be closed out when the current exchange rate crosses a given threshold.
For a short position, the TPO order will be set below the current exchange rate, and vice versa for a long position.

Firt-in First-out (FIFO)

In Forex trading it refers to an order queue structure where all positions opened within a particular currency pair are liquidated (closed) in the order in which they were originally opened.

Good Until Canceled (GTC)

Limit orders can be good for a specified time period (hours, days, months) or "good till canceled". A GTC limit order is held open indefinitely (unless filled) and is only terminated on instructions by the account holder.
A GTC order remains active in the market until you decide to cancel it. Your broker-dealer will not cancel the order at any time. Therefore it's your responsibility to remember that you have the order scheduled.

Good For the Day (GFD)

A GFD limit order is held open for the balance of the trading day unless it is filled before then. A GFD order remains active in the market until the end of the trading day. Remember that the end of the day in Forex is usually 5P.M. EST, but in any case double check with your broker-dealer.

One Cancels the Other (OCO)

An OCO order is a combination of two limit and/or stop-loss orders at opposite ends of the spread. Two 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 canceled. Example: The price of EUR/USD is 1.0050. You want to either buy at 1.0100 in anticipation of an up move or open a sell position if the price falls below 1.0000. If 1.01005 is reached, the buy order is triggered and the sell order is automatically terminated.

You can also use this type of orders when already in an open trade. For example, if you are in a long position, the stop loss is placed below the entry price, right? In this case the OCO limit sell order would be placed above the entry price. If the base currency rate breaches the OCO trigger price then the position will automatically be sold and the original stop loss is canceled. Alternatively, if the rate falls to the stop loss threshold, then the position will be closed out for a loss and the OCO limit order terminated.