A trading order refers to an action through which traders instruct their brokers to act on specified trading positions. For forex traders, the most important positions are the points of entry, exit position, and stop loss. You have several options to get these actions executed through trading orders.
The key orders are discussed below.
Market orders
This type of order is an action by a trader, asking the broker to enter or exit a trade at the next available market price. However, you should note that some markets are very dynamic, and prices may change as soon as you place your order.
You may get a fill at a lower price than you intended if the price goes down around the same time as placing your buy market order. If, however, the price appreciates when you buy at the market price, you may get higher than the planned entry price.
Similarly, if you place a sell market order, and the price plummets instantly, you will sell at a lower price than expected. This may diminish the chance to minimize your loss or prevent you from optimizing your profit, as you get a worse than expected entry price.
Market orders have the advantage of saving traders time because they don’t have to wait for the price to move. They are used mainly by scalpers because they allow them to execute their entries and exits faster.
Entry orders
This is an order that ensures that the trade is only executed when the set price is met. They are favored by traders who are keen on maximizing breakouts. The downside to this is that a trader has to wait for the right price to be attained, but this may take up a lot of your time.
Limit order
This order specifies an upper limit and a lower limit from the market price, upon which an asset can be traded.
If you place a buy limit, you will have instructed the broker to buy when an asset’s price goes below a certain price. On the other hand, a sell limit order will require the broker to sell the asset when the price goes above a specified level. This means that the order may take a relatively long time to execute if the specified price has not been attained.
How does a limit order work? Assuming that GBP/USD is trading at 1.4050, and you want to go short when it reaches 1.4080, you don’t have to wait for the price to be met. Instead, all you need to do is initiate a sell limit order of 1.4080. The order will get executed at the best price above 1.4080 automatically.
Stop-loss order
This is an order whose effect will be to minimize losses if the price movement goes against your position. It can be either an opportunity or a risk to traders, depending on how high or how low the market shifts from the level you place it.
One of the reasons some traders dislike it is because of the possibility of the price beginning to rise steadily shortly after crossing the stop loss. Not only does this deny them the opportunity to make profits, but it also exposes them to losses.
On the other hand, it is a good way of limiting emotional impact on trading because without a stop-loss, many traders would risk overtrading, thus potentially losing more money.
Trailing stop order
This is an open-ended stop-loss order. It is readjusted as the price moves and is designed to lock in your profit each time the price rises to a specific level. Trailing orders helps you keep your profits in case the price goes against your position.
For example, assuming that you buy the yen when USD/JPY is trading at 110.00 and your trailing stop order is at four pips below the price. If the price rises to 110.04, the trailing stop will be adjusted to 110.00, so you will have reduced your risk by four pips.
In the absence of the trailing stop, your risk would be eight pips. If USD/JPY appreciates to 110.10, you will lock in a profit equivalent to 6 pips.
Take-profit order
In this case, a trading position is closed immediately after the targeted profit is obtained. You need to specify the price at which you will be willing to take your profit. This is especially effective if you feel that you may not track price changes manually for a long time.
If you are initiating a take-profit buy order, it means that you are hoping that the asset will appreciate and rise above your entry point. Therefore, the order price should go above the current price.
If it is a take-profit sell order, you expect the price to depreciate and go below your entry point. Therefore, you should place your order price above the current price.
Expiration of orders
Market orders are executed at the prevailing price. Thus, they are not very flexible. However, you can modify the other types of orders by including the End of Day (EOD) order or the Good Till Cancel (GTC) order.
EOD allows the order to remain effective until the closing of the day’s trading session. On the other hand, GTC lets the order remain open until you get the price you wanted or until the order is canceled.
Bottom line
Orders allow you to execute trades. Different orders can also be used as part of a trading strategy. You can use several types of orders, but it is essential to know their risk factors and potential rewards.