A basic introduction to the different order types used in the forex market

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A basic introduction to the different order types used in the forex market 1

Have you ever found yourself unsure of what order to use, or where to correctly position it? If you have, then this article will help in providing a good foundation. It’s surprising how often we find traders that do not understand even the most basic entry order techniques, yet they feel they’re ready to tackle the live market. Make sure that you fully understand and are COMFORTABLE with your broker’s order system before stepping into a live trading environment.

With that said, let’s move on and have a look at some of the basic orders traders can use…

Market orders

This order type is often the first execution order that traders come across. Just as its name implies, this is an order that’s executed at market and is immediate. This means that if you want to enter or exit the market instantly, you can use a market order to trade at the next best available price. However, you might want to note that in a fast-moving market where price can change in seconds, the price can alter substantially between the time the order is placed and the time that it’s completed/filled. This, fellow traders, is called slippage.

As an illustration, let’s imagine that the EUR/USD is currently trading at an asking price 1.2121 and has a bid of 1.2120. If you wanted instant access to this market, then you’d have the choice of either buying at 1.2121 or selling at 1.2120. To exit a position on the other hand you would, assuming that you’re long, sell the position back to the market at the next best available price. To cover a short, nevertheless, you simply reverse and buy back the position at market.

The difference between the bid/ask price is known as the spread, which is essentially the broker’s fee/commission.

Limit orders

We’re really fond of this type of order, as it can be positioned away from current market price. A limit entry order is used to either buy below or sell above market price. It’s also very handy as a take-profit execution order as well!

With regards to a buy order, let’s say that the EUR/USD is trading at 1.3150 and you believe that if price connects with 1.30, the pair will rally. If you’re unable to monitor price, you could elect to set a buy limit entry order at your desired level. So, when/if price strikes this number, a buy order will be executed with or without you being present.

For a sell order, it’s the same but works in reverse. Let’s imagine that the EUR/USD just bounced from 1.2950 and is heading in the direction of 1.30. You believe that this number has the potential to hold as resistance, but you’re unable to monitor price. In this case, you could set a sell limit entry order at 1.30 and once price interacts with this number, the order will be filled.

When using limit orders, you’ll only be filled at the price you designate or better.

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Stop-entry orders

Instead of setting a buy order BELOW market price as you would do when using a limit order, a buy-stop order can be positioned to buy ABOVE current price. It’s just the inverse with sell orders. A sell limit order would be placed ABOVE current price, whereas a sell-stop order would be sited BELOW price.You use stop-entry orders when you feel that the unit will move in one direction.

This is a common entry order used by pin-bar traders as per the diagram below:

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Stop-loss orders

A stop-loss order, also known as a ‘stop order’ or ‘stop market order’, is an order whereby the trader/investor instructs the broker to automatically liquidate a position if the instrument advances or declines past a certain point.

This is, in our humble opinion, probably the most important order to understand! To limit losses, market participants use a stop-loss order to take them out of the market when they are wrong. And guys, you will be wrong at times! If you do not have the time to monitor your position, a stop-loss order can really save your skin!

For example, if you’re long at 1.3256 on the EUR/USD and your strategy says that if price crosses 1.3236 that you’re wrong, this is where a stop-loss order should be positioned. Once/if price crosses this line, the trading platform will automatically execute an order to sell at the next best available price (assuming that you’re using a stop market order).

In closing

Of course, there are plenty of different orders used by traders every day. The above four, however, are what EVERY trader SHOULD know before considering a live trade.

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