There are different types of forex orders that you can place in the forex market.
If you have used different forex trading software, they must have exposed you to the various types of forex orders.
As a forex trader, it will be of great importance for you to know the various orders provided by forex brokers and the implications of each.
The number of order types that you use to run your trades will be determined by the forex broker you have chosen.
But generally, there are about 10 types of forex orders that you will find in the market.
Entering a wrong type of order, or failure to enter an order at all may result into a significant amount of loss when trading currencies.
Different forex orders serve different purposes.
Some orders are for helping traders to take profits or losses, others are for protecting profits, and there are those used to implement complex technical trading strategies.
If you want to become a successful forex trader, you have to learn how to use the different order types correctly and establish the discipline of using the proper order types depending on the market conditions.
In this article, I will help you understand the different types of forex orders that are available for you.
You will then know how to choose the right forex orders based on your trading goals and market conditions.
Different Types of Forex Orders
In this section, we will be discussing the various types of forex orders that you can use.
As a trader, you should learn how to enter each of these forex orders correctly depending on the trading platform that you are using.
Additionally, each type of forex order has specific characteristics that each trader should become familiar with and be in a position to discern the most appropriate use for each order when trading.
So, these are the different types of forex orders available for you…
This is the most basic type of forex order and mostly the first order type that forex traders come across.
Market orders are executed immediately by a dealer or broker unless when entered in a very large size or when the markets are moving very fast.
Just as the name suggests, the purpose of market orders is to buy or sell a currency pair at the current market exchange rate.
As a trader, you can use a market order to establish a position in the market by going either long or short.
A market order can also help you to close a position by buying or selling it back.
The good thing with market orders is that they are always executed provided the market maker or the broker can obtain an execution rate.
However, when using market orders, you may get unfavorable rates if the market is moving quickly against the direction that you need to execute a trade.
The same will be the case if the market is not able to adequately absorb the amount that you need to trade at the quoted price.
A limit order is a type of order that helps you specify the worst exchange rate at which you want an order to be executed.
Traders can use limit orders to stop out losses on positions and to take profits.
Its name originates from the fact that the trader requests that transactions entered into on his behalf be limited to the ones executed at the stated exchange rate or better.
Practically, the limit orders are typically executed at the specified rate, although a better rate for execution of the order may be offered by a market maker or a broker especially to impress a good client.
So, with a limit order, you only enter a trade once the price reaches your desired level.
Suppose the market is currently trading higher.
You are not interested in going long at the current price.
You think that it is overbought, hence, it’s too high.
So, your intention is to buy at a lower price.
The solution is to put in a limit order at a lower or the desired level.
If the market comes back lower and hits your lower price level, you will be filled on your trade.
So, you will only enter the market if it comes to the level that you desire, meaning that you will be trading with pullbacks.
Most forex traders prefer using a specific type of limit order known as a Fill or Kill or a FOK order which can take two forms.
The first FOK order type tells the broker to completely fill the order at a specific price right away or to cancel the order.
The second FOK order type instructs the broker to fill whatever they can of the order immediately at the specified price and then cancel the rest.
It is mostly used by forex traders when they are trading a huge amount of currency.
The good thing with limit orders is that you will be entering your trades at a cheaper price, meaning that you will have an improved risk to reward ratio.
However, it has a downside in that you may miss the move because the market may fail to come to the level that you desire.
Secondly, it will mean that you are trading against the current momentum.
This means that if the market is trading higher, you will place a limit order if the market comes down.
So, you will be entering a momentum that is against you.
However, there are mechanisms that you can use in order to circumvent this.
You may wait for a reversal candlestick pattern before the market makes a higher close.
It is at this point that you can enter the trade.
Take Profit Orders
A take profit order is a common type of limit orders.
Just as the name suggests, a take profit order is used by currency traders who want to liquidate an existing forex position at a profit.
Technically, the level stated in a Take Profit order must be better than the prevailing market rate.
If the initial position of the trader is a short position, his Take Profit order will involve buying back that short position at a rate that is lower than the prevailing market.
Conversely, if the trader was holding a long position subject to Take Profit order, it would have been liquidated if the market moved upwards to touch the specified order level.
Sometimes, traders can have their Take Profit orders be of AON (All or Nothing) type.
It means that the order should be filled completely, or not at all.
The AON orders are normally used to prevent partial order fills that can be undesirable.
Alternatively, traders can choose to take a partial fill of a lesser amount compared to the entire Take Profit order amount.
This can be very useful if a broker or a dealer trying to fill an order can only execute a part of the order at the exchange rate stated in the order.
Stop Loss Orders
This is another type of forex order commonly used to liquidate existing forex positions.
The order is executed as a market order after the stop loss level is triggered by the currency price as it trades at that level.
Basically, when the market goes against the existing position to a point where the exchange rate reaches the specified stop loss level, the Stop Loss order will be executed and it usually causes the trader to make some loss.
So, the trader exits the position after making some loss.
However, the Stop Loss order prevents the trader from making a further loss if the exchange rate keeps on moving in the unfavorable direction.
This means that entering a Stop Loss order is a good risk management strategy for most Forex traders.
So, a Stop Loss order is not an entry order, but it’s an exit order.
Suppose you buy at support thinking that the market will keep on trading higher, then you place a Stop Loss order below the support.
What will happen in case the market collapses lower?
It will trigger your Stop Loss order, and you will be out of the trade for a loss.
This means that it limits your downside.
Even though you will have made a loss, it will prevent you from making a further loss.
Imagine the market collapsing all the lower when you don’t have the Stop Loss order.
Your initial loss will be very big.
Actually, that is how most trading accounts for forex traders are wiped out.
So, a Stop Loss order acts as a defense mechanism to protect your capital in case the market moves against you.
If you cut your losses, it means that you are living to fight another day.
You have to look for a way to prevent your trading account from being blown up, and the Stop Loss order can act as a defensive mechanism against this.
The downside of the Stop Loss order is that the market may reverse back in your intended direction.
Remember that this will occur at a time when you have already exited the trade.
You will then miss out on making profit.
Stop Limit Orders
This is another type of forex order, and it shares the qualities of both a limit order and a stop order.
Basically, after attaining the exchange rate of the stop level, the order becomes a limit order which is to be executed at the specified exchange rate limit or better.
This type of forex order can be very useful when you need to avoid severe slippage on stop loss orders in fast markets.
The reason is that stop losses are normally executed at the next available market price.
However, this type of forex order has a risk in that the market moves very quickly through the stop level and never recovers enough so that the order is executed at the stated exchange rate limit or better.
Trailing Stop Orders
After establishing a position in forex, it may begin to appreciate in value as the market moves in a direction that favors your trade.
At the same time, profits will begin to accumulate and you will need to protect them.
In such a case, traders use Trailing Stop orders.
This type of forex order trails the movement of the price.
Of the different types of forex orders that we have discussed, this is the only forex order that shifts its position.
If you are in a long position, the Trailing Stop order will shift upwards as the price action moves upwards, favoring you.
This means that for each single shift upwards, the Trailing Stop will lock in profits that the trader has earned and in case the market reverses and begins to move contrary to the current trade, the profits won’t be wiped out of the trading account.
If you are in a short position, the Trailing Stop order will shift downwards as the price action moves downwards.
Again, for each single shift that the Trailing Stop order makes downwards, it will lock in profits that you have earned so far.
If the price action reverses and begins to move contrary to your trade, the Trailing Stop order will be triggered and you will exit the trade.
This means that the market reversal will not wipe out your profits from your trading account.
So, Trailing Stops are initially placed to lock in profits, but at the same time, they allow the profits to keep on running.
If the profits for the current position increase, the Trailing Stop is repositioned closer to the market so that more profits are retained in case the market makes a reversal or a pullback.
The Trailing Stop orders are not called stop loss orders since the profits are being taken.
However, because Trailing Stops are placed at levels that are less favorable compared to the current market, traders still consider them as stop orders.
Good Til Cancelled Order (GTC)
The GTC order means that the order will stay in the market and will be subject to being executed until it is canceled by the trader who placed it in the market.
Majority of the limit orders used in the spot forex market are known to be GTC orders, so forex traders rarely use this designation when running their trades.
However, for traders who deal with financial instruments trading on centralized exchanges like currency futures, they have to state that the order they enter is a GTC order.
The reason is that the order may be a Day order that will become void if it remains unexecuted when the current trading session ends.
Good for the Day
A Good for the Day order is also known as a Day Order.
It is not commonly used in the forex market because currencies trade around the clock from Sunday afternoon up to Friday afternoon, New York time.
Day Orders are popularly used in centralized markets, such as the stock market in which each trading day ends at a certain time and resumes the next trading day.
It is also a good type of order for currency traders trading on the International Monetary Market futures exchange in Chicago and its electronic platforms that have a fixed trading day.
A good number of forex traders trading via online forex brokers or on over the counter market may want to state the cancelation time for an order so as to open a new position corresponding to the end of their trading day.
This is especially the case for any trader who wants to be a day trader and doesn’t want to hold a position overnight.
In that case, the good for the day order will be best option compared to the other different types of forex orders.
These are the types of forex orders that allow a trader to enter the market at a specified market price.
As a trader, it’s not possible for you to keep on monitoring the market every second.
Of course, you want to enter the market when it is moving in the direction that you desire.
This is the only way you can run successful trades on forex.
However, it’s not easy for you to keep on watching the movement of various forex pairs to enter a trade when the market favors you.
That is where entry orders come in.
If you think that the market may take a certain action like a break out through a price that it has been touching without breaking, you can use an entry limit order.
Once the price crosses the entry limit order, you will enter the market.
However, entry orders can be double-edged swords.
They have an advantage in that you can enter the market when the market moves favorably when you are away or when you are not paying a close attention.
However, entry orders have a disadvantage in that the market may touch your entry order and take it negative before you are given a chance to evaluate the move.
That is why you must put good risk management practices in place.
One Cancels the Other (OCO)
Of all the different types of forex orders discussed above, none of them allows a trader to execute more than one orders at a go.
However, this is possible with the OCO order.
The One Cancels the Other order simply means that the trader enters two orders at a go and the execution of one order will require the other order to be cancelled.
A good example of such a situation is when a trader gets into a position and enters both a protective stop loss and a take profit order at the same time.
Many forex traders will want to avoid a situation where the existing position may be closed out at the take profit level but a new position may be started if the market reverses to stop at the stop loss level before the cancellation of the order.
When using this type of order, the trader may specify that either of the two orders may be cancelled if the order is executed by entering an OCO order after placing their take profit and stop loss orders.
One Triggers the Other Order
This type of order is used by a trader who wants to enter an order after another order gets executed.
A good example is when a trader places a limit order in the market because he wants to enter into a position at a particular exchange rate level.
If the limit order is triggered or executed, the trader may want to add a protective stop loss order.
The trader may also want to enter a take profit order to close out the position once it moves in a direction that favors him after entering.
A trader faced with such a scenario may want to enter his initial limit order so as to potentially open the desired position once it gets executed with the broker stating that it is a One Triggers the Other Order.
If the order is triggered, the trader will want to enter a take profit order and a stop loss order into the market.
By the use of the One Triggers the Other Order type, traders are able to specify to their brokers that the latter two orders should not be placed into the market before the execution of the initial limit order.
If the initial limit order is executed, it will trigger the entry of the desired take profit and stop loss orders into the market.
A slippage is the difference between the stop or market loss order execution price and the level at which a stop loss order was placed or the market was quoted for a market order.
Order slippage tends to be greatest when the forex market moves quickly and liquidity reduces below normal.
These two conditions normally occur after monetary policy announcements, release of major economic news, or other important news stories that have an impact on the financial markets.
Most retail traders choose to test an online forex broker for slippage on the orders that have been executed in fast markets as a way of measuring the quality of their order execution service.
With this knowledge, the best online brokers guarantee order levels for their clients, managing to effectively reduce their order slippage to zero.
Additionally, traders who use back testing methods to determine and compare the potential profitability of various trading strategies should consider taking into account the possibility of a slippage.
This should be the case if they plan to use a market or stop loss order so as to enter and exit positions.
If you want to avoid getting poor execution rates which are normally caused by slippage, you can use a limit order rather than a market order if you are operating in fast market conditions.
This can subject you to the risk of failure on filing the order so you may place the limit on your order at a rate that is worse than the quoted market rate.
This way, you will remain fairly certain of the execution.
You will also be able to specify a rate below which you will not need to sell or a rate above which you will not want to buy.
This will help you to control your slippage to some extent.
Limit orders are mostly used by institutions and professional traders when they have a huge transaction and a budgeted exchange rate in mind.
They are also common among traders who need to avoid getting poor execution levels on the market orders at times when the market exchange rate is moving too quickly.
So, this article about different types of forex orders has helped you know the various types of orders that you can choose to run your forex trades.
It’s up to you to evaluate the orders that have been discussed and choose the one that will help you meet your trading goals.
This is what you’ve learned in this article….
- There are different types of forex orders that you can choose when trading on forex.
- Some of these orders control how you enter the market while others control how you exit the market.
- As a forex trader, it is good for you to know the different types of forex orders that are available to you and what it means to use each type of order.
- Failure to choose forex orders correctly is an avenue to making loses on forex.
- The Market Order is the simplest and the most popular type of forex order available for traders.
- They are executed immediately by a dealer or broker, unless when entered in a very fast moving market or in a very large size.
- Other than the Market Orders, there are other types of forex orders that help you to take profits or losses, protect profits, and come up with complex trading strategies.