Most forex traders and investors, especially at the entry level to the currency exchange markets do not realize that the markets are extremely unpredictable. This is often true due to the popular notion that forex traders expect that there are some rules that dictate the movement of the foreign exchange markets. This is a wrong assumption as many traders find themselves at a disadvantage at a later point in time (or trade).
Most traders focus on trying to learn the mechanics of the foreign exchange trade and spend their efforts on trying to find a utopian method for predicting movements. That is how it can be summed up. An utopian effort. Having said that, there are various trading tools to assist forex traders to predict the direction of the markets and such tools usually do quite an efficient job. But even in the hands of the most experienced traders, the best forex tools tend to fail while attempting to predict the market’s movements accurately.
Orders form one of the basic elements in forex trading. There are different kinds of forex orders that traders can make and control your trades in the Foreign exchange markets. While most trading is straight forward with order entries and the opening or closing of a position, a beginner to forex trading may be quite overwhelmed with terms such as stop-loss, trailing stop, or take profit orders and so on. A basic knowledge on the types of forex orders is crucial in order to manage your forex trading accounts properly.
A market order is the simplest and most commonly executed type of a forex order. In a market order execution, a trader buys and sells the currency at the rate prevailing in the market at the time of placing the order.
Due to the size and the volatility of the markets, trends can switch directions at any instant, so forex traders prefer placing orders at a market price in order to safeguard themselves against any adverse market conditions. A good example when NOT to use market order can be seen especially in times of volatile markets where the spreads can vary a lot. It is a general practice to avoid market order type of forex execution during periods of high volatility.
In a limit order type of forex execution, a trader will specify a price at which he intends to buy or sell the currency. If a trader bought EUR against the USD at 1.7910, then the trader can place a sell order at 1.7990, when the exchange will execute the order and the trader would profit from such a kind of limit order. In the event the target price is not achieved during the day, the limit order that is placed is cancelled.
While limit order may seem as a profit taking strategy, the primary disadvantage being that the markets may never move in the desired direction (reach your desired price) thus leaving you with a limit order trade that may never see light. Conversely, limit order facilitates better planning by reducing arbitrariness in trading decisions, and eliminates the risks that come with sudden price spikes in the markets to a great extent.
Stop loss order
Markets attract volatility and hence stop loss order is of the essence. A stop loss order determines the maximum loss a trader is willing to take. Based on the earlier example cited, if the risk-taking ability of a trader is low, then they could place a stop loss at 1.7813, at which level the exchange will book losses and the trader won’t be affected by any fall below 1.7813. A stop-loss order should be set in the opposite direction to where a trader speculates the price quote to move.
Such an order is filled only when certain conditions set forth by the trader are met in the market, which the order specifies. The entry order can be of two types, namely a limit entry order or a stop entry order.
- Limit entry order: Limit entry order can be best explained using this following example. Let’s assume that the current market price for EUR/USD is 1.7915-10. This means that the trader can transact at these levels. A trader can execute a limit entry order to sell his holdings at a price more than the market price, say, 1.7925. Such type of an order would be executed only if the set price is attained. Likewise, a trader can place an order for buying at a level of, say 1.8700, and this ‘buy’ order would remain as pending till the price falls to that level.
- Stop entry order: Stop entry order is usually implemented when a trader has enough reasons to believe that the currency being traded is in a fixed range and therefore the currency is on the verge of a breakout from that range.
The trader might want to buy the currency at a price higher than the market price or sell at a lower price than the market price. In the same example, the trader may go ahead and buy at
1.8720 or sell at 1.7925, where it is believed that once these levels are attained, the currency will only go up or further continue to fall, whatever the case may be. A trader exercises the stop entry order only when they have reasons to believe that there will be sudden spikes in the currency rates in the Forex market. Understanding different types of forex orders is essential as traders can use these types of orders to their advantage.