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Learn / Market Insight / Basic Forex Order Types: Tips to Enter and Exit the Market

Basic Forex Order Types: Tips to Enter and Exit the Market

December 18, 2021


When it comes to the entire trading process, the quality of your trading execution begins with your order placement. Placing the right order according to your intentions is a simple yet significant part of your trading strategy.

Getting the Opening Moves Right

Placing the wrong order type can result in an early entry or a missed trade. An early entry resulting in a losing trade is an unnecessary cost. It can even reduce your capital significantly enough to prevent you from taking future trading opportunities. A missed trade, on the other hand, can be an expensive opportunity cost. If a missed trade goes in your favor can negatively affect your overall trading performance.

Likewise, placing the wrong exit order can result in an early fill; an inconvenience, especially if your position happens to be in a favorable spot.

Fortunately, the solution is quite simple: know your basic orders and get them right each time.

There are three basic orders:

  • Market order
  • Stop order
  • Limit order

It’s important to become familiar with each order and to know when and how to use them. Different strategies will require different order types. Using the order that best fits the situation can help prevent you from making costly execution errors.

The Market Order

Placing a market order is like saying “I want to buy or sell this asset now at whatever price it’s being offered or asked.”

A market order is all about immediacy, as it allows you to buy or sell a currency pair immediately at the best available price. Typically, market orders are used when you need to get in or out of a position quickly and right away.

Caveat: There are times when the speed of your fill will come at the expense of a favorable price level or spread. This is called slippage. Over time slippage can eat into your profits or add to your losses. So, use a market order only when you absolutely need to get into or out of a position. Otherwise, stop and limit orders might be more preferable.

The Stop Order

You’re looking to enter the market ahead of the current price.

For instance, currency ABC/XYZ is trading at 1.0100 and you’re looking to go long when price reaches 1.0120. You would need to use a buy stop order to enter above the current market price.

Or perhaps you’re looking to “go short” the currency. Expecting the currency pair to drop, you want to enter a short position when it reaches 1.0080 from its current trading price of 1.0100. You would need to use a sell stop order to enter below the current market price.

Once a stop order is triggered, it immediately becomes a market order. But the important thing here is that the stop order is all about entering a price level ahead of the current price in the direction you are anticipating.

But what if you want to take a reverse approach, buying below or selling above the current price? That’s what limit orders are designed to do.

The Limit Order

If you’re looking to buy a currency pair at a specific price below the current market price, then a buy limit order is what you’ll need to use. Likewise, if you’re looking to short a currency pair above the current price, then a sell limit order is warranted.

Placing a limit order is like saying, “I want to enter the market at this price or better.” What might confuse some trader is the “or better” part of the statement. What does it mean exactly?

If you’re looking to go long, “better” means at a lower price. So, if a currency pair is trading at 1.0100 and you want to enter at 1.0080, then “better” means any price below 1.0080. After all, you’re trying to buy low and sell high, so the lower the better.

If a currency pair is trading at 1.0100 and you’re looking to short it higher at, say, 1.0120, then “better” means any price higher than 1.0120. Again, you are looking to sell high (or higher) in order to buy it back low.

Caveat: Between market, stop, and limit orders, limit orders sometimes run the risk of not getting filled, as the market may trade beyond the limit order price well before your order gets filled. So, if you’re using limit orders, pay attention to the market action once price gets close to your order.

Warning: some traders confuse stop orders with market orders, and that can lead to accidental entries.

Let’s say a currency pair is at 1.000 and you want to buy at a breakout of resistance at 1.0050. But instead of placing a stop order at 1.0050, you accidentally place a limit order. The result is that you’ll get filled immediately, because the current price of 1.000 is “better” than 1.0050.

Exiting Markets with Market, Stop, and Limit Orders

Market Orders to Exit: If you need to exit a long position right away, whether it’s to sell your position or buy to cover, placing a market order may be your best move.

Stop Loss Order to Exit: Stop losses orders are exactly what they indicate: “stop” orders. If you’re going long, you’d place a sell stop below your entry price; if you’re short, you’d place a buy stop order above your entry price.

Limit Orders to Take Profit: If you’re looking to place a “take profit” order on a long position, then you would use a sell limit order which seeks to close your position at the intended price or better. The reverse is true of a short position—you’d place a buy stop order to cover your short.

The Bottom Line

Order placement is the first step in every trade. It can also be the first error of any trade. Knowing your basic order types can help you reduce your trading blunders and increase your chances of success by simply getting your entries or exits right.

There is a high level of risk in Margined Transaction products, as Contract for Difference (CFDs) are complex instruments and come with a high risk of losing money rapidly due to the leverage. Trading CFDs may not be suitable for all traders as it could result in the loss of the total deposit or incur a negative balance; only use risk capital.

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