What is an order?
One of the first things every forex trader should know is about the different order types and implications of each one. An order in forex determines how you will enter or exit the market. Today, in trading, more options are available than just buying and selling at the current market price. With different order types, one can make the most of their trading opportunities.
Why are different order types needed in the forex market?
There needs to be some automation in the forex market. As we know that forex is 24 hours market, investors’ holdings, and their net worth keeps changing 24/7. If an open position is not managed regularly, the profit/loss figure can change drastically. Also, it is not possible to manage your positions all the time if you are working full time.
Therefore, in such a scenario, pending orders came in handy. These are tools investors and traders in the forex market use to manage their open positions. ‘Orders’ allow the traders to ensure that the value of their trades remain within certain bounds even though the market is open all day. Now let’s look at different order types.
Market orders are the most common types of orders used in the forex market. It is just an order to buy an asset at the current market price. Market orders are executed on a real-time basis when placed. Since prices in the forex market are changing rapidly, the order may be completed at a different price than you intended. This is known as slippage in market terminology. Slippage may work in the favor or against an investor. A market order creates an open position immediately.
A pending order is an instruction to buy or sell an asset when certain conditions are met. It is a type of market order that gets executed only when certain conditions are fulfilled. It is a conditional market order. Pending orders eliminate the need to monitor the screen for placing trades continuously. It sets up an automatic order system that will execute trades instantly when the conditions are met. There are different types of pending orders. They are:
- Buy Limit Order
- Sell Limit Order
- Buy Stop Order
- Sell Stop Order
Let’s understand each of these orders below.
Buy & Sell Limit Order
It is an order placed by the traders to buy or sell a currency at a particular price. Typically, this price is better than the current market price. Traders can find both buy and sell limit orders in most of the trading platforms. A buy limit order will always be below the current market price (or sometimes equal), while a sell limit is always above the current market price (or sometimes equal). For instance, if you want to buy EUR/USD at 1.05 and the current market price is 1.11. You can place a limit order at 1.05, and your order will automatically get executed if the currency pair reaches this price.
Application limit orders
Let us assume that the market is in a downtrend. As a trend, you wish to sell precisely at the support and resistance line. Since a market order does not assure the precise price, you can prefer placing a sell limit order instead. This is because, with a limit order, your order will get executed at the exact price you were willing to take the trade.
Buy & Sell Stop Order
This is the converse of Limit order. By using this order, traders can place a buy order above the market price and a sell order below the market price. By doing this, they can increase the odds of entering or exiting the trade at their preferred price.
Application of stop orders
Let’s say the market is in a range and there is some news coming up which you think will break above the range and head north. You being a breakout trader wish to buy it after the breakout. During the news, the volatility is so high that it is hard to get hold of a good price if executing a market order. So, here is where a stop order comes to action. With this order, you can keep a buy stop order just above the range, as it will execute the trade automatically when the price hits the buy stop price.
It is an order placed by the traders to limit their losses on the trades they take. By using this order, a currency pair can be bought or sold once its price reaches a particular price, also known as ‘Stop Price.’ For instance, if you buy USD/CAD for $1.31 and not willing to lose more than $0.1 when you exit, you can place your stop-loss order at $1.21. This order only gets executed if and only if the price of the currency goes below $1.21.
There are more premium orders that are being provided by the advance brokerage firms. Some of them include Trailing Stop-Loss Order, After Market Order, and Bracket Order, etc. The forex market is gradually moving towards artificial intelligence for executing trades. The latest development in ‘orders’ is the creation of dependent orders. This means the investor can place two orders simultaneously, and based on the input, only one of the two will be executed. Dependent orders use complex algorithms that execute trades with minimal human intervention.