Typically, you ask for your favorite meal when you walk into an eatery. Assuming the forex market is an eatery and forex traders are the customers, then returns/profits are on-demand meals, which makes brokers the waiters and market makers the chefs. Well, this is a simplistic way of looking at the most sophisticated and liquid market in the world, but it helps if you are to know and understand forex orders.
Forex orders are the instructions that investors send to their brokers using trading platforms such as MetaTrader 4 (MT4) that ask the brokers to initiate or cancel a transaction. The instructions are specific in terms of what to do and at what price. A forex order asks the broker to enter or exit a position in the market, though more sophisticated orders exist whose function is to maximize returns and to cut losses.
In other words, forex orders are how investors manage their trading activities. Different brokers offer various orders, but the basic ones like market orders are common across the board. The first step towards successful trading is knowing what these orders are and how to refine your trading strategy.
Types of forex orders
Back to the eatery. Eateries have menus from which customers pick their favorite dish. When ordering, the customers give specific instructions about whether they would like a hot mug of coffee or a whole French fries plate. In the forex market, traders order brokers to do three things; to open a new position, close an active position, or modify an active position. These are the meals available on their menus. Below are the four common forex orders:
- Market orders
Market orders are the embodiment of the basic forex order known to the market. They entail the instructions you send to your broker directing them to open or close a position based on the current market price. Brokers fill such orders instantaneously, making them the fastest orders in the market.
All brokers offer market orders, which often appear as buy/sell buttons on the trading platform. Because they require little work from the brokers, market orders attract the lowest commissions. Market orders work best when trading currency highly liquid currency pairs whose orders fill fast.
The problem with market orders is slippage. Slippage happens when the broker fills your order at a price other than the one you saw when initiating the order. Remember, the instructions are to fill the order at the current market price. In a fast-moving market where the price changes fast, the price could be quite the opposite of what you saw when pressing the buy/sell button. Now, the difference between the price you intended to fill the order and the actual price of filling is what refers to order slippage.
- Stop orders
A stop order is like an advanced market order. In this order, the trader identifies explicitly the price at which he/she wishes the broker to fill the order. But there is a catch. This order first converts to a market order before the broker fills it, meaning stop orders are still susceptible to slippage.
Why would you make a stop order? Well, this is like low-level automation of trades. Instead of sending an order to the broker to exit the market (after you already sent the market order), what you do is tell the broker in advance that when the market price reaches a certain point, convert my order to a market order and fill it at the best price available.
Stop orders are of two major types. A buy stop order tells your broker to buy a given currency pair when the price reaches a specified point or higher. Contrariwise, a sell-stop order instructs the broker to sell a given currency pair once the market reaches a predetermined level or lower.
With a stop order, you achieve three objectives. First, it enables you to exploit specific price movements such as breakouts. Secondly, a stop order limits your losses when the market moves against your position. But when you are winning, a stop order protects your profits if the market does a sudden about-turn.
- Limit orders
A limit order comprises a specific price at which the broker ought to fulfill the order. Now, you might have noticed that this sounds much like stop orders, but the difference is that limit orders cannot be filled if they disadvantage the trader. It means the broker can only fill the order at the specified price or better. If that is impossible, the broker will enter a new position and then wait for another best opportunity.
You will find subcategories of order types under this category, including limit-buy orders and limit-sell orders. With this order, a trader can set a particular profit objective because you will only accept profitable prices.
- Trailing orders
A trailing order is a modified stop order that ‘trails’ an open position. There is always a constant distance between the open position and the stop order, say ten pip, meaning the stop order advances one step if the open position advances in a long position. However, the stop order remains out of the market price declines. A trailing order can also be a limit order such that you have a trailing limit order. They all behave similarly.
In short, forex trading is all about sending orders to the broker, who then executes them based on your instructions. Understanding what each order type means and its significance is critical if you have to succeed in the market. Market orders are the basic ones that require a simple click of a button. Stop, limit, and trailing orders are mechanisms to protect profits as well as cutting losses. A firm grasp of how these orders work is a lifesaver. Besides, making use of the advanced orders helps to reduce the amount of time you have to spend watching price charts.