Forex Trading Basics | Types of Forex Orders.

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FOREX TRADING BASICS

TYPES OF FOREX ORDERS

In the retail forex market, an order is a set of instructions communicated over the forex trading platform that specify the foreign currency pair to be traded, the quantity to be traded, whether the trade is to buy or to sell and when or at what price to execute the trade. Many forex trading platforms have evolved to make order entry quick and simple, usually with just a click or two of the mouse. In some cases, orders can be created by clicking on a chart. It is also possible to automate order entry by interfacing the trading platform with a black box or other type of mechanical trading system. Regardless of how they are created, forex orders, like orders in other markets, fall in to three broad categories.

THE FOREX MARKET ORDER

Forex market orders are the simplest and fastest way to execute a trade. With a market order, the trade is executed immediately at the currently quoted bid or offer, under normal market conditions.

THE FOREX LIMIT ORDER

A forex limit order is used when the trader wants to buy the base currency at a price that is below the market or sell the base currency at a price that is above the market. A limit order is price contingent meaning that it can only be executed when the market reaches the limit price of the order. Forex limit orders remain in effect until cancelled by the trader or until they expire. Depending upon the retail forex trading platform, limit orders can be set to expire at the end of the day or at the end of any specified date and time.

The trader will use a limit order to establish a new currency position if he believes that the market will reverse direction after reaching the limit price of the order. In other words, the trader desires to buy on a dip or sell on a rally. For example, say that a trader expects the British Pound to appreciate against the dollar. GBP/USD is currently quoted at 1.5418/1.5423 but the trader wants to buy at a better - meaning cheaper - price. So, the trader may use a limit order to buy GBP/USD say, at 1.5415. Should the market dip sufficiently to the limit price, then the order will be filled. Of course, should the market not dip as expected, then the limit order will not be filled and the trader will miss out on a potentially profitable trade. That is the risk of using a limit order to enter a position instead of a market order.

A limit order can also be used to close an open currency position and typically, this is done to take profit on a trade. For example, say that a trader is long USD/JPY at a price of 90.77 and desires to take profit should the exchange rate rally to 90.95. In this case, the trader will enter a limit order to sell USD/JPY at 90.95.

THE FOREX STOP ORDER

A forex stop order is a price contingent order that is used when the trader wants to buy the base currency at a price that is above the market or sell the base currency at a price that is below the market. A stop order is price contingent meaning that it can only be executed when the market reaches the stop price of the order. Forex stop orders remain in effect until cancelled by the trader or until they expire. Depending upon the retail forex trading platform, stop orders can be set to expire at the end of the day or at the end of any specified date and time.

The trader will use a stop order to establish a new currency position if he believes that the market will continue to move in the same direction as the previous momentum after hitting the stop order price. This is usually done if the stop price represents a level of support or resistance. If prices rally through resistance and hit the stop price, then the trader will buy the base currency expecting that prices will continue to rally. Similarly, if prices fall through support and hit the stop price, then the trader will sell the base currency expecting that prices will continue to decline.

A stop order can also be used to close an open currency position and typically, this is done to limit the loss on a newly established trade. It can subsequently be trailed to lock in gain on the open currency position.

The FIFO Rule. Forex dealers registered with the CFTC and NFA are required to offset or close customer positions in the same currency pair on a first-in, first-out basis. Say, for example, that a trader bought 10,000 EUR/USD on three occasions as the Euro drifted lower with the last buy done at 1.3545. Thereafter, the Euro began to recover and the trader sold 10,000 Euros at 1.3550. This sale will not close the most recent purchase to show a realized gain of 5 pips. Rather, it will close the first position, according to the rule, and show a realized loss of 15 pips. While the FIFO rule does not affect total account market value, it does prevent the linking of stop and limit orders to particular positions. Check with your forex broker.

Stop vs Limit. It might be helpful to remember this distinguishing feature between the stop and limit order: A stop order to buy is placed above the market and a stop order to sell is placed below the market. A limit order to buy is placed below the market and a limit order to sell is placed above the market.

The Trailing Stop-Loss. Stop orders on most forex trading platforms can be set to automatically trail the market and thereby lock in gain on an open currency position. A stop order to buy will trail the market lower while a stop order to sell will trail the market higher. The trader can decide the amount by which to trail.

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Keywords: forex trading basics, forex education, forex orders, forex trading platform, forex limit order, forex market order, forex stop order
Abstract: This part of our forex education tutorial covers types of forex orders.