Types of Forex Trading Orders - Market, Limit, & Stop Orders

Forex - Market, Limit, & Stop Orders

MARKET ORDERS

A market order is executed immediately when placed. It is priced using the current spot, or market price. A market order immediately becomes an open position and is subject to fluctuations in the market. This means that should the price move against you, the value of your position deteriorates this is an unrealized loss until the order is closed.

A limit order is an order to buy or sell, but only when certain conditions included in the original trade instructions are fulfilled. Until these conditions are met it is a pending order and does not affect your account totals or margin calculation.

The most common use is to create an order that is executed automatically if the price reaches a certain level. When the conditions of a limit order to BUY or SELL are met, the order is automatically executed. Limit orders are usually placed in areas where you think the price will reach, and then reverse from in the opposite direction.

Example: If the price of EUR/USD is at 1.1900, but you only want to SELL if the price gets up to 1.1950, you can place a SELL LIMIT order at 1.1950. If the price reaches that level, your trade will automatically be entered at that level with your predetermined position size and STOP orders.

STOP ORDERS

A stop order is also an order to buy or sell, but only when certain conditions included in the original trade instructions are fulfilled. Until these conditions are met it is a pending order and does not affect your account totals or margin calculation.

The most common use is to create an order that is executed automatically if the price level reaches a certain level. When the conditions of a stop order to BUY or SELL are met, the order is automatically executed. Stop orders are usually placed in areas where you think the price will reach, and then continue moving in that direction.

Example: If the price of EUR/USD is at 1.1900, but you only want to SELL if the price gets up to 1.1950, you can place a SELL LIMIT order at 1.1950. If the price reaches that level, your trade will automatically be entered at that level with your predetermined position size and STOP orders.

STOP-LOSS and TAKE-PROFIT

A stop-loss order is a defensive mechanism used to protect against further losses. It automatically closes an open position when the exchange rate moves AGAINST you and reaches the level you specified.

For example, if you are LONG on EUR/USD at 1.1900, you are expecting it to move up. If the price moves down instead, you will be losing money the further the price moves against your intended direction. To limit your losses, a stop-loss order can be placed before or during your trade to restrict your losses to a certain amount. Let's say you were willing to lose up to 50 pips on this trade. If you entered the trade at 1.900, you would set your stop-loss to 1.1850. This means that if the price reached the 1.1850 level, your trade would automatically be exited regardless if you were at your computer or not. This prevents you from losing more money on a trade than you intended to risk.

A take-profit order is similar to a stop-loss order, but for the opposite purpose. A take-profit order automatically closes an open trade when the price has reached your intended target. Remember, you haven't actually won or lost any money until you close the trade. Until then, your profit or loss is just fluctuating as an open order waiting for you to cash out by closing the trade.

For example, let's imagine you are again LONG on EUR/USD at 1.1900, and you are expecting it to move up. If the price moves up as expected, you will be making money the further the price moves in your intended direction. To lock in your profits, a take-profit order can be placed before or during your trade to ensure you book a profit if the price reaches your intended target. Let's say you were aiming to make 100 pips on this trade. If you entered the trade at 1.900, you would set your take-profit to 1.2000. This means that if the price reached the 1.2000 level, your trade would automatically be exited regardless if you were at your computer or not, and you'd be 100 pips richer! A take-profit also helps prevent you from losing money on a trade that may reach your target, but then turns around and goes the other direction before you had a chance to close the trade; remember, you haven't made or lost any money until you actually close the trade!