Order Types in Forex

  • November 14, 2020

Do you know the order types in Forex trading? How many different ways are there to trade currency? The good news is that you'll find out here!

An order is an instruction from a trader to the broker that shows the way how a trader wants to enter or exit the market. We will discuss some of the most commonly used orders in the Forex market.

Order Types in Forex

  • If we're starting out in Forex trading, then it's reasonable to assume we want to know the order types in Forex. Is it much different than trading stocks? For example, is there a limit order vs a stop order? Knowing the best orders to place is a great way to gain and protect profit. That's the goal right?
Order Types in Forex

1. Order Types in Forex: Market order 

Market orders are part of the order types in Forex. A market order is an order to buy or sell an underlying asset immediately at the best price available. This type of order guarantees that the order gets executed. 

However, remember that in a fast-moving market the price paid or received may be quite different from the last price quoted before the order was entered.

In other words, you may pay a lot more or sell a lot lower than the price you thought you were getting. That's the gamble with market orders and the bid vs ask

2. Order Types in Forex: Limit Orders

Limit orders are part of the order types in Forex. A limit order is an order to buy or sell an instrument at a specific market price. It's also referred to as a pending order. They can be used to enter a new position or exit a current position.

To understand how limit orders work let's assume that the market price of the EUR/USD is at 1.2540. But your analysis suggests a buying entry below the market price at 1.2520.

That's when you place a buy limit order at 1.2520. Then when price comes down to that level, your order will be filled. Note that the buy limit order cannot be used to buy above the market price.

Now if you want to close your EUR/USD position in profit at 1.2560 you'll place a sell limit order at 1.2560.

Then as the market reaches that level. your position will close with a profit of 40 pips. Also, note that the sell limit order cannot be placed below the current market price.

What Are the Different Types of Forex Trading?

  • What is Forex? And what are the order types in Forex? You can trade currencies, which is Forex trading, just like you would stocks. There is scalping, day trading, swing trading and position trading. It all depends on what strategy you want to use and what chart timeframe you're looking at. 

1. Stop Orders

Stop orders are part of the order types in Forex. They're also pending orders. In fact, they're specifically designed to prevent the additional losses.

Let’s assume that you bought GBP/USD at 1.2260 and are willing to risk 60 pips but no more than that. As a result, you'd place a stop loss order at 1.2200.

In case the market drops to 1.22000 your stop sell order would be filled. As a result,  your loss would be contained. Please note that a sell stop cannot be placed above the market.

Similarly, if you have a selling position you can place a stop buy order to prevent the losses. Let’s once again assume that you sold USD/JPY at 106.60.

You want to contain your losses within 40 pips. So you would place a buy stop order at 107.000; which will prevent your loss if the market goes beyond 107.00 level. Remember that a buy stop cannot be placed below the market price.

Stop orders are an integral part of your trading plan. They help you contain your losses and provide you the necessary space for planning and rectifying the mistakes made in trading.

2. OCO Order

OCO orders are part of the order types in Forex. One cancels the other or the OCO is an order type that's comprised of two orders in which if one order is filled the other order automatically gets canceled.

In this order type, one order is placed above the market price while the second order is placed below the market price.

Why use the OCO order? Let’s say the EUR/USD was trading in a range of 1.2000 and 1.2100 for few days. You believe that if the pair breaks the upper range (1.2100) it would trend higher and if it breaks the lower range (1.2000) it would trend lower.

But you're not sure which side will break. That's when you'd place an OCO with a buy order above and a sell order below the current trading range.

Then you're set to take a position in either direction. Remember that once an order in the OCO is executed the other order would be automatically canceled.

An OCO order is an effective way of planning your trades and can be very helpful especially in the range-bound markets.

3. Trailing Stop Order

Trailing stop orders are part of the order types in Forex. A trailing stop order is a very effective order to manage the risk and optimize profit. It's not generally used as an entry order but rather used when you already have an open favorable position which is accumulating profit.

The main benefit of this order is that it not only secures your profit but also limits the potential losses.

To understand how trailing stop works let’s say you bought USD/JPY at 106.20. The price moves up to 107.00 bringing you in a profit of 80 pips.

Now you want to secure the profit and also capitalize further from the up-trending market. To do so you decide to risk a part of your profit and set a trailing stop with a distance of 30 pips from the current price.

Now as the market moves up the trailing stop would also increase and keep a distance of 30 pips below from the current market price. So if the market price goes up to 107.50 the trailing stop loss would move up to 107.20.

Finally, after trending higher the pair starts to fall and reaches the trailing stop limit at 107.20 where trailing stop order would execute in a profit of 100 pips. This is how the trailing stop allows you to keep accumulating profit by risking a part of your profit in a trending market.

A trailing stop is ideal for both the long and short positions. Keep in mind that trailing stop distance needs to be big bough so that small price fluctuations do not result in premature exits.

Order Types in Forex Bottom Line

Now that you know the order types in Forex, we hope this helps you with placing trades. The more you know how the stock market works the better off you'll be.

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