The term
"order" refers to how you will enter or exit a trade. Here we discuss
the different types of orders that can be placed into the foreign exchange market.
Be sure
that you know which types of orders your broker accepts. Different brokers
accept different types of orders.
There are
some basic order types that all brokers provide and some others that sound
weird.
Order Types
Market order
A market
order is an order to buy or sell at the best available price.
For
example, the bid price for EUR/USD is currently at 1.2140 and the ask price is
at 1.2142. If you wanted to buy EUR/USD at market, then it would be sold to you
at the ask price of 1.2142. You would click buy and your trading platform would
instantly execute a buy order at that exact price.
If you ever shop on Amazon.com, it's kinda like using their 1-Click ordering.
You like the current price, you click once and it's yours! The only difference
is you are buying or selling one currency against another currency instead of
buying a Justin Bieber CD.
Limit Entry Order
A limit entry is an order placed to either buy below the market or sell above the market at a
certain price.
For
example, EUR/USD is currently trading at 1.2050. You want to go short if the
price reaches 1.2070. You can either sit in front of your monitor and wait for
it to hit 1.2070 (at which point you would click a sell market order), or you
can set a sell limit order at 1.2070 (then you could walk away from your
computer to attend your ballroom dancing class).
If the
price goes up to 1.2070, your trading platform will automatically execute a
sell order at the best available price.
You use
this type of entry order when you believe price will reverse upon hitting the
price you specified!
Stop-Entry Order
A
stop-entry order is an order placed to buy above the market or sell below the
market at a certain price.
For
example, GBP/USD is currently trading at 1.5050 and is heading upward. You
believe that price will continue in this direction if it hits 1.5060. You can
do one of the following to play this belief: sit in front of your computer and
buy at market when it hits 1.5060 OR set a stop-entry order at 1.5060. You use
stop-entry orders when you feel that price will move in one direction!
Stop-Loss Order
A stop-loss order is a type of order linked to a trade for the
purpose of preventing additional losses if price goes against you. REMEMBER THIS TYPE OF ORDER. A
stop-loss order remains in effect until the position is liquidated or you
cancel the stop-loss order.
For
example, you went long (buy) EUR/USD at 1.2230. To limit your maximum loss, you
set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD
drops to 1.2200 instead of moving up, your trading platform would automatically
execute a sell order at 1.2200 the best available price and close out your
position for a 30-pip loss (eww!).
Stop-losses
are extremely useful if you don't want to sit in front of your monitor all day
worried that you will lose all your money. You can simply set a stop-loss order
on any open positions so you won't miss your basket weaving class or elephant
polo game.
Trailing Stop
A
trailing stop is a type of stop-loss order attached to a trade that moves as
price fluctuates.
Let's say that you've decided to short USD/JPY at 90.80, with a
trailing stop of 20 pips. This means that originally, your stop loss is at 91.00. If price goes down and hits 90.50, your trailing stop
would move down to 90.70.
Just
remember though, that your stop will STAY at this price. It will not widen if
price goes against you. Going back to the example, with a trailing stop of 20
pips, if USD/JPY hits 90.50, then your stop would move to 90.70. However, if
price were to suddenly move up to 90.60, your stop would remain at 90.70.
Your
trade will remain open as long as price does not move against you by 20 pips.
Once price hits your trailing stop, a stop-loss order will be triggered and
your position will be closed.
Weird Orders
"Can
I order a grande extra hot soy with extra foam, extra hot split quad shot with
a half squirt of sugar-free white chocolate and a half squirt of sugar-free
cinnamon, a half packet of Splenda and put that in a venti cup and fill up the
"room" with extra whipped cream with caramel and chocolate sauce
drizzled on top?"
Ooops,
wrong weird order.
Good 'Till Cancelled (GTC)
A GTC order remains active in the market until you decide to
cancel it. Your broker 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 order remains active in the market until the end of the
trading day. Because foreign exchange is a 24-hour market, this usually means
5:00 pm EST since that's the time U.S. markets close, but we'd recommend you double check with your broker.
One-Cancels-the-Other
(OCO)
An OCO
order is a mixture of two entry and/or stop-loss orders. 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.
Let's say the price of EUR/USD is
1.2040. You want to either buy at 1.2095 over the resistance level in
anticipation of a breakout or initiate a selling position if the price falls
below 1.1985. The understanding is that if 1.2095 is reached, your buy order
will be triggered and the 1.1985 sell order will be automatically canceled.
One-Triggers-the-Other
An OTO is
the opposite of the OCO, as it only puts on orders when the parent order is
triggered. You set an OTO order when you want to set profit taking and stop
loss levels ahead of time, even before you get in a trade.
For example, USD/CHF is
currently trading at 1.2000. You believe that once it hits 1.2100, it will
reverse and head downwards but only up to 1.1900. The problem is that you will
be gone for an entire week because you have to join a basket weaving
competition at the top of Mt. Fiji where there is no internet.
In order
to catch the move while you are away, you set a sell limit at 1.2000 and at the
same time, place a related buy limit at 1.1900, and just in case, place a
stop-loss at 1.2100. As an OTO, both the buy limit and the stop-loss orders
will only be placed if your initial sell order at 1.2000 gets triggered.
In conclusion...
The basic
order types (market, limit entry, stop-entry, stop loss, and trailing stop) are
usually all that most traders ever need.
Unless
you are a veteran trader (don't worry, with practice and time you will be),
don't get fancy and design a system of trading requiring a large number of
orders sandwiched in the market at all times.
Stick
with the basic stuff first.
Make sure
you fully understand and are comfortable with your broker's order entry system
before executing a trade.
Also, always check with your broker for specific order information
and to see if any rollover fees will be applied if a position is held longer
than one day. Keeping your ordering rules simple is the best strategy.
DO NOT trade
with real money until you have an extremely high comfort level with the trading
platform you are using and its order entry system. Erroneous trades are more
common than you think!
