The Full Set of Forex Trading Orders
- What is a Trading Order?
A trading order is an instruction to your broker to buy or sell a financial asset on your behalf. The order-driven system in all modern exchanges automatically matches buyers and sellers.
The proper use of a trading order adds control to your positions and significantly reduces risk and trading costs. Different brokers may offer different sets of trading orders, and therefore, when choosing a broker, you must ensure that the full range of trading orders is available.
Market and Pending Orders
Generally, trading orders are divided into market orders and pending orders.
- What is a market order?
A market order is an order to buy or sell a financial asset immediately, at any given price. This order type guarantees execution but does not guarantee the execution price.
- What is a pending order?
Pending orders are executed at a pre-specified market price. A pending order can be placed in advance, or afterward, a position is opened, it can also be modified at any time. The great advantage of a pending order is that eliminates the risk of slippage.
- What is Slippage?
Slippage refers to the difference between the price expected and the price at which the order is actually filled.
Main Types of Forex Trading Orders
Forex trading offers a wide range of trading orders.
(1) Market Orders
A market order is executed immediately, at the current price quoted on the market.
(i) If you are opening a Long (buying) position, your order will be matched with the lowest-price seller
(ii) If you are opening a Short (selling) position, your order will be matched with the highest-price buyer
- You should never place market orders if you are trading with a Dealing-Desk
- During news releases, the risk when you place a market order is very high
- In the Foreign exchange market, market orders are less painful due to high liquidity and significant market depth
(2) Stop-Loss Orders
Stop-loss orders allow traders to limit their trading risk. More specifically, a stop-loss allows closing a trade position at a desired price level, and thus avoid a further loss.
(i) Close a Long (Buying) position, when the price of an asset has dropped below a specified price
(ii) Close a Short (Selling) position, when the price of an asset has climbed above a specified price
Stop-Loss Orders are very important to all Forex traders as a tool for preventing huge losses if the market has moved against their expectations.
- Do not place a stop-loss order close to the current exchange rate, in most cases, market noise will stop you
- If you apply technical analysis, don't focus on the first support/resistance level, prefer the second S/R level as your stop-loss level
- Limit the use of capital leverage, in order to be able to place the right stop-loss orders
- Dealings desks cannot guarantee your stop-loss
(3) Take-Profit Order
A Take-Profit Order is an order that closes a trading position when a certain amount of profit has been achieved. The take-profit order is very useful for all types of market conditions, but especially for ranging markets.
(i) Close a Long (buying) position, when the price of an asset has climbed above a specified price
(ii) Close a Short (Selling) position, when the price of an asset has dropped below a specified price
A trailing stop order is a conditional order that uses a trailing stop price level, rather than a fixed stop price level.
- A trailing stop-loss order adjusts the stop-loss price at a number of points or a fixed percent above/below the current market price
- A trailing take-profit adjusts the take-profit price at a number of points or a fixed percent above/below the current market price
- In fast-moving markets, a trailing take-profit order offers a unique opportunity to run and secure your profits
- A trailing take profit will maintain a trade open, as long as the market is moving in the trader's favor. However, if the market changes direction, the order will be closed, securing most of the profits
(5) Guaranteed stop-loss orders (GSLO)
A Guaranteed Stop-Loss Order ensures that a position will be closed, no matter the market conditions and slippage. This type of order may prove important for swing traders. Of course, nothing comes for free, and therefore, GSLO orders are offered in premiums:
(i) GSLO orders come with a spread premium
(ii) GSLO orders cannot be placed very close to current market prices
A Guaranteed Stop-Loss is usually offered by Dealing-Desks (market makers). As mentioned above, dealing-desk trading suffers from high slippage on order execution.
(6) One-Cancels-the-Other Orders (OCO)
An OCO order is a complex trading order that combines a stop price and a limit price. Actually, two different orders are placed within an OCO order, but only one of them can be executed at the end. That means that if one order is executed then the other order is automatically canceled. OCO orders can be added to an existing position.
Here is an example highlighting the utility of an OCO order.
EURUSD is at 1.1000, and you anticipate a movement to 1.1050.
-But you are also expecting the pair to probably test the support level of 1.0980, before moving to 1.1050.
-There is also a resistance at 1.1010 which you consider very significant. If EURUSD crosses above 1.1010, then you expect a movement straight to 1.1050.
To cover all these scenarios, you can place an OCO order:
- Order-1, if EURUSD reaches 1.0980, buy 2 lots
- Order-2, if EURUSD breaks 1.1010, buy 2 lots
If one of these two orders is executed, the other will be automatically canceled. In the end, you will have bought 2 lots of EURUSD either at 1.0980 or 1.1010.
Two tips for avoiding mistakes when placing trading orders
Making mistakes in order placement can be extremely painful when trading the Foreign Exchange market. Here are two simple tips to minimize your risk, especially if you are a beginner:
(A) Practice trading orders in a Demo Account before trading for real money. In this way, you may train with all available orders without risking your own funds. This approach can prove quite useful when you plan to use complex trading orders, such as trailing stops and OCO (presented below).
(B) When you start trading for real money, place small pilot orders. For example, before you execute an order worth 2 lots, you can place a small pilot order worth just 0.1. When your small order is executed, then multiply the results by x20, and you will be able to calculate the cost and the risk of a 2.0 lots order before you execute it.
■ Forex Trading Orders
G.P. for OnlineForex.biz (c)