5 Order Types in Forex
The world of Forex trading offers individuals and institutions many ways to place an order. However, new traders might be confused by the various order types in Forex. By the end of this article you should have a good idea of the various types and how they can help you in your goal of Forex trading.
What is a Forex Order?
When you place a trade in the Forex spot market, you are actually entering into a contract for differences. If you are trading USD vs JPY, you aren’t actually purchasing any Yen or USD with your transaction. You are purchasing a contract for the difference in price.
Let us take a quick look at an example trade. In this example we’ll assume that the USD/JPY price is listed at 111.60. (We’ll ignore the spread in this example.) If you were to place a Sell order, then you would expect the price to drop, for example to 111.50. When you place your order you are entering into a contract for the difference in price.
Conversely if you were to place a Buy order, then you would be placing a contract for differences between 111.60 and for example, 111.70. Remember that your leverage will cause you to gain (or lose) more than the .10 you might expect to win/lose.
When it comes to placing the order there are several ways that you can do so. Let’s look at them.
The first two order types in Forex are Limit Orders. These orders are designed to fill at the price you specified or better. A Buy Limit order would fill at the price you specified or LOWER. A Sell Limit order would fill at the price you specified or HIGHER.
Buy Limit Example
Let’s take a look at a Buy Limit example.
In the image below you will see that price has risen sharply in one hour. In this example we place a Buy Limit order at 50% of the 2nd up candle shown on the chart. When we place the order the price is ABOVE our desired BUY price.
In this situation the broker would fill the price at the entry we requested or LOWER, which would give us the better price.
Sell Limit Example
Now that you have looked a buy limit, lets take a look at the Sell Limit example.
In the image below you will see that price dropped sharply in one hour. In this example we place a Sell Limit order at 50% of the down candle indicated in the graphic. When we place the order the price is BELOW our desired SELL price.
In this situation the broker would fill the price at the entry we requested or HIGHER, which would give us the better price.
The second two order types in Forex are Stop orders.
A Stop order is the reverse of a limit order. The basic concept here is that you place a Buy ABOVE the current price, or a Sell BELOW the current place. When price rises or falls to your predetermined entry point, the order is activated.
Please know that we’ve greatly simplified the definition of a stop order. You may want to see more information about stop orders.
Buy Stop Example
Let’s take a look at an example Buy Stop order.
In the image below you will see that price has risen sharply in one hour. We then see price drop and stay low for a while. Let’s say that at the yellow arrow you decide to enter a Buy Stop.
In this situation your broker would fill the order at the price you requested. Obviously you would want the price to keep going up (since this is a buy) in order to profit.
Sell Stop Example
Now that you have looked a buy stop, lets take a look at the Sell Stop example.
In the image below you will see that price rose sharply in one hour. We see that price hovered near the high point for a while before starting to drop.
Suppose at the yellow arrow you decide to enter a Sell Stop, with entry being at the 2nd green arrow. Your broker should fill the order at the price you requested. Obviously you would want the price to keep dropping in order to make a profit.
Click Image to Enlarge
Another of the order types in Forex is the Market Execution. When you make this type of order, you are placing the order at the price shown by your broker at that exact moment in time. Remember, that with your spread the price could be anywhere from a few points to a few PIPs in difference from what you see on the chart.
You’ve now seen 5 different order types in Forex. With these methods you have new tools in your trading tool kit to make smart trades.
An easy way to remember the difference might be as follows. Think of a “Stop” order price as a Stop sign, and current price as the car. When the price gets to the “Stop” order, you actually want price to “Run the Stop sign” and keep going.
Each of these methods of entering a trade will come in useful to you. It might be that you stick to Market Execution orders, or maybe you end up preferring to always enter via a Limit or Stop method. Either way you choose knowing the difference is very important, and should be considered required knowledge in Forex trading.
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