Order Types in Forex06/26/12
There are different kinds of orders the traders are able to place while playing in Forex. Below you will see the four main types of the orders.
- Market Order
This is the most simple and common type of the order. The trader purchases and sells the currency at the rate prevailing in Forex at the time of placing the order. Thanks to the gigantic size of the market and high volatility, the rate trends may reverse at any moment, so traders prefer to place orders at the market price in order to guard themselves against any adverse trend.
- Entry order
This type of the order will be filled only when specific conditions are met in the market, indicated in the order. There are two kinds of the entry order: a limit entry order or a stop entry order.
- Limit entry order
For instance, the current market price for currency pair is 0.6505-10. This means that you can transact at these levels. In this case, you can put a limit entry order to sell your funds at a price more than the market price, say, 0.6515. Your order would only be executed if that price is attained. Vice versa, you can place an order for purchasing at a level of, say 0.6500, and your “buy” order would remain pending till the price falls to that level.
- Stop entry order
This kind of order is usually used when you have reasons to believe that the currency is trading in a fixed range and think that it’s on the verge of a breakout from that range. You may want to purchase at a price higher than the market price or sell at a lower. For instance, you may go ahead and purchase at 0.6520 or sell at 0.6590, where you think that once these levels are attained, the currency will only go up or fall further. You exercise the stop entry order only when you have grounds to believe that the market will face sharp movements in the currency rates soon.
- Stop loss order
Because of the volatility, stop losses are very important – they define the maximum loss you can afford to suffer. In the example above, if your risk-taking ability is low, you may place a stop loss at 0.6505, and it will be the level at which the market will book losses for you, and you won’t be affected by any fall below 0.6505.
- Limit order
The trader announces a price at which he wants to buy or sell the foreign currency. For example, if a trader has purchased one currency against the other at the price of 0.6510, he can later place a sell order at 06525, so that he profited after execution of the order However, the order will be automatically cancelled if the target price isn’t achieved during the day.