Different types of Forex orders
Order management is an important part of not just the trading style, but also better risk management. Although forex trading may appear to be as easy as pressing the ‘Buy’ or ‘Sell’ order button and closing the trades on benefit (or loss), there are several other ways a trader may approach the markets. In this post, you’ll learn about the various methods for placing forex orders, as well as what they all mean.
Orders in the forex market can be divided into two categories:
- Market orders
- Limit Orders
What exactly are market orders?
If you’ve been trading forex for a while, you’re probably familiar with the term “market order.” The order to buy or sell a security at the current market price is known as a market order. It’s as simple as pressing the buy or sell button. For eg, if EURUSD was currently trading at 1.31051 (bid) and you wanted to buy, you would simply click the ‘Buy’ button to place a market order. When you put an order, it is merely a market order that is executed. Similarly, when you click ‘Close’ to close your trade, you place a market order to ‘Sell’ to close the previous buy position.
When do you use a market order?
Market orders are best used in fast-moving markets and where you only need a few pips to make a profit. Scalpers and traders who want to trade a news event to take advantage of a demand that is set in a specific direction prefer market orders. Market orders allow you to enter and exit trades quickly and easily. Market orders are the best form of orders to use if your trading style is focused on scalping or making a few pips in income.
What exactly are Limit orders?
Limit orders are a form of order that is only used by professional traders. A limit order is a buy or sell order for a security at a particular price. There is no guarantee that your limit order will be filled when you position it (executed). This is because a limit order is only enabled when the price you specified is reached.
When is a limit order useful?
Limit orders are useful when trading for the long term or on higher time frames, and they can also be used in conjunction with your trading strategy and approach. Limit orders normally have an expiration date. When placing limit orders, you have the option of selecting GTC (good until cancelled) or EOD (end of day expiry) (where the order expires by end of the day). You may also set a time period in which the limit order will automatically expire if it is not met.
Limit orders are used by most swing traders, but some intra-day traders use them as well, and it all depends on their trading style and strategy.
Another advantage of limit orders is that you don’t have to sit in front of your charts waiting for the price to hit your desired amount. You may simply place a limit order, which will be executed once the price exceeds your limit order stage.
Stop Orders – What are these?
Stop orders are also used in conjunction with limit orders. A stop order, as the name suggests, is an order to buy or sell (i.e., to close the trade) when the price exceeds the required stop order level. Stop orders are also referred to as stop-loss orders and take profit orders. Consider the following scenario to better understand stop orders:
GTC: Buy 1 lot of EURUSD with a Limit order at 1.32 and stop orders at 1.325 and 1.31.
So, what exactly does this imply?
With a limit order at 1.32, you buy 1 lot of EURUSD. Since it is a Good-till-cancelled form of expiry, the order is only activated when EURUSD exceeds 1.32. At the same time, you set a profit and loss limit of 1.325 and 1.31 respectively. So, if EURUSD exceeds 1.32 and then drops to 1.31 (indicating a losing trade), the stop order (in this case, a stop-loss order) is activated. When the price drop to 1.31, your trade is closed.
Similarly, when the price hits 1.325, your stop order is activated, and you exit the market with a profit of 1000 pips.
Trading Strategies and Order Types
The types of orders you use are normally determined by the trading technique you employ. For example, some trading strategies require you to place a limit order on a recent swing high or the open or close of the previous candle. Scalping strategies, on the other hand, enable you to trade based on price action and thus position market orders.
If you’re wondering which of the two forms of orders is better, the response is that they’re both excellent. It all depends on your trading goals and preferences. Stop orders, on the other hand, are necessary and must be used regardless of the form of order. Stop orders, especially stop loss orders, protect your money from depreciation due to unanticipated price movements, giving you enough cash to face the next trading day.