Forex trading is a great money-making opportunity for everyone, regardless of where you live around the world. However, there are risks involved, and that is why it is essential to understand the basics and technical aspects of the Forex market before getting started.
Order types are part of Forex basics, but they will be of significant help when you get to the technicals. Normally, there are different order types, and they are all fundamental to successful trading. Prop trading firms, for example, usually utilize various order types and provide advanced trading tools, ensuring traders enjoy fast order executions.
In this article, we will take you through the different order types, how they are used, and how they can impact your trading outcome.
What Is an Order in Forex Trading?
An order in Forex trading is an instruction given to the broker by a trader to execute a trade on their behalf. The order includes the amount, currency pair, and the type of trade to be executed. Orders in Forex trading can be executed at the current market price or at a specific price depending on the market condition or a trader’s strategy. These two orders are referred to as Market orders and Pending orders, respectively.
Market Order
A market order is one of the most commonly used types of order in Forex trading. It is simply buying and selling an asset at the current market price. When you open a market order, you are telling the broker to buy or sell a currency pair at the available price.
This order type has a few characteristics, including;
- Immediate Price Execution: Market order is usually executed instantaneously, ensuring traders enter a trade at the best price possible for better profits.
- High Liquidity: Market order is mostly used in liquid markets, where the risk of slippage is minimal and the market has momentum.
- Price Uncertainty: Sometimes, the order may not be filled at the exact price at which you bought the asset. The execution price may differ slightly from the intended price, especially in volatile markets.
Pending Orders
Pending orders are the opposite of market orders. These orders are executed at a specific price set by the trader. They are instructions to execute a trade slightly above or below the current price. This type of order helps traders focus on other things instead of staring at the charts and waiting for the price to reach their point of interest.
For example, if a trader has a meeting to attend and has spotted a buying opportunity, they can simply place a pending order and go about their day. Once the price reaches the desired position, the trade will be automatically opened. Pending orders include limit orders, stop orders, and stop limit orders.
Types of Pending Orders:
Limit Orders
This is an instruction to either buy below the market or sell above the market at a specific price once it is reached.
- Buy Limit Order – The order will only be executed if the price falls at or below the limit price. This type of order gives a trader more control over the market, ensuring their entry is executed at the intended price. However, this order does not guarantee execution. If the market does not reach the specified price, the trade won’t be executed.
For example, a trader wants to buy EUR/USD, which is trading at 1.2510. He believes that the price will fall to 1.2500 before going long. To ensure he does not miss the opportunity, he places a buy limit order at 1.2500. If the market declines to that price or lower, his order will be executed, but if the price does not reach that level, the pending order will be unfilled.
- Sell Limit Order – A sell limit order is set to sell an asset or currency pair above or at the specified price. The order is only executed if the price reaches the limit price or exceeds it.
Stop Orders
This is another type of pending order. Stop orders are instructions to buy above the market and sell below the market at a specific price. The main types of stop orders are;
- Buy-Stop Order: Buy-stop order is usually placed above the current price of an asset. This type of order is used when the price of an asset is rising, with the expectation that the price will continue in an upward trend.
For instance, a trader is watching the GBP/USD pair, which is trading at 1.3020. He believes that if the price rises to 1.3040, it will continue going up. For an accurate entry, he places a buy-stop order at 1.3040. Once this limit is reached, the buy-stop order will be triggered and converted to a market order.
- Sell-Stop Order: This type of order is the opposite of the buy-stop order. It is only activated if the market price is below or at the stop price. It is used when the market is on a downtrend, and the trader believes the price will continue going down.
Stop Limit Order
A stop limit order is a combination of a stop order and a limit order. When the stop price set is reached, the stop limit order converts to a limit order, where the price will be triggered to buy or sell. The two types of stop limit orders are: Buy Stop Limit and Sell Stop Limit.
Examples
- Buy Stop Limit: A trader wants to open a long position on the GBP/USD pair currently trading at an exchange rate of 1.2000. The trader believes that if the price goes up to 1.2100, it indicates the market is in a bullish trend. However, he also wants to ensure he does not buy anything above 1.2120.
So, what does he do? He sets the buy-stop limit with a stop price of 1.2100 and a limit of 1.2120. If the GBP/USD pair reaches 1.2100, the stop order will be triggered. The order then becomes a limit to buy at 1.2120 or lower. The order will be filled if the price goes to 1.2120, and if it goes above 1.2120, it will not be executed.
- Sell Stop Limit: EUR/USD is currently trading at 1.2500. A trader wants to sell the currency pair if it drops to 1.2400 but does not want to sell the asset for less than 1.2380. In this case, the stop price becomes 1.2400, and the limit price becomes 1.2380.
So, the trader will place a sell-stop limit order with these prices. If the currency pair drops to 1.2400, the stop order will be triggered. The order then becomes a limit order to sell at 1.2380. The order does not get filled if the asset price drops below 1.2380 before the order is filled.
With the stop limit order, the trader gains more control over their entry and exits, ensuring they do not execute their trades at unfavorable prices.
Take Profit and Stop Loss Orders
Apart from the orders mentioned above, beginners must also understand these two types of orders to manage risks effectively. Take profit is a pending order that allows you to automatically close a trade once you reach the set target price. In other words, it locks in your gains, eliminating the need to constantly watch the market for long hours.
On the other hand, a stop loss order is set to limit losses on a position opened. It automatically closes an open trade if the price goes against you. If the market becomes volatile suddenly, this order will help protect your account from significant losses.
Assuming your risk-reward ratio is 1:2 and you want to open a long position on GBP/USD, currently trading at 1.2500. You will place your stop loss order at 1.2490 and your take profit at 1.2520. If the price rises, your profits will be secured once the price hits 1.2520, and if the market goes against you, your losses will be stopped once the price reaches 1.2490.
Order Types and Prop Trading Firms
Proprietary trading firms offer most of these order types, allowing traders to execute trading strategies that may be challenging in individual Forex accounts. Prop firms also have advanced trading tools that enable fast order executions.
For example, if you want to place a market order, you are more likely to execute it at the intended price when trading with a prop firm. This is because proprietary trading firms enable instant order placement by bypassing intermediary brokers. Prop firms like Audacity Capital also have high liquidity, which minimizes the chances of slippages, ensuring trades maximize their profits.
Audacity Capital provides a trading capital of up to $2 million and enables its traders to utilize different order types for maximum profitability. To enjoy the privilege of trading with various order types, click here.
Conclusion
It is crucial for Forex traders to understand different order types to develop effective risk management strategies. Market orders offer immediate execution of trades, allowing traders to enter and exit the market quickly. On the other hand, pending orders require a price to reach a specific point for the trade to be executed and provide more control for the traders.
Proprietary trading firms make it even easier for traders to use these order types by providing trading capital, enhanced execution speed, and better risk management strategies. A combination of knowledge and effective trading tools makes a trader’s journey smooth and satisfactory.
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