Introduction to Order Types in Forex
Forex has different order types which allow traders to automate entering and exiting positions. When traders know which order type to use in a specific market condition, they can optimise their trading strategies and utilise the trading platform's functionalities.
What is a Forex order?
A forex order is a set of instructions that the broker uses to buy or sell a currency pair on the forex trader's behalf. It allows traders to put any type of price restrictions on the trade and specify the price at which they want to enter or exit positions. Orders can also include conditional information for how long the order should be open, under which circumstances the order can be cancelled and more.
Types of orders in forex
A market order involves buying or selling a currency pair at the best available market price. The forex broker executes a market order when traders place it at the prevailing market price. Hence, this market order type is best when a trader wants to exit or enter a position quickly without specifying a price. If the forex market is highly liquid and has low spreads, the execution price can be close to the market price. However, if the market is less liquid and more volatile, the execution price may deviate from the current market price. In such a situation, if the market price is not executed, the broker requests a requote and offers a new price as per the best available price.
A limit order lets traders buy or sell a currency pair at the specified price. The trade only gets executed if it reaches the specific price unless it’s canceled otherwise. This allows traders to enter and exit positions at a predetermined price and not rely on the current market prices. Limit orders are mostly placed during volatile markets to ensure that the trade is executed at the price level of choice. There may also be a scope of partial execution with limited orders. This means if the marker reaches the specified price only for a portion of the order, the portion is executed, and the remaining order remains open until it is cancelled or expired. For example, if a trader wants to buy USD/EUR but only at a price of 1.1 or lower, they can place a limit order to buy at 1.1. If the market price reaches 1.1 or lower, the order will be executed, and if it does not, the order will remain open until it is cancelled by the trader or expires.
A stop order in forex allows traders to buy or sell a currency pair at the specified price or a price worse than the specified price. The goal is to manage risk by limiting potential losses if the market moves against the expected direction. A stop order can be placed at any time once the trade is opened and can be modified or cancelled as per the trader's demand. Once the stop level is reached, the order is executed at the next available best price. There are three types of stop orders:
- Stop-loss order enables traders to sell a currency pair at a specified or worse price (below the current market price) if the market moves against their long position.
- A trailing stop order is like a stop loss order that helps traders minimise market risk. The stop level is set a certain distance from the current market price and executed if the market moves in their favour.
- Stop-limit order enables traders to buy or sell a currency pair at a specified or better price (more than the current market level) after the exchange rate reaches the stop level.
An if/then order is a conditional type of order that allows traders to set up two orders simultaneously. The second order is linked to the first order and is only executed/triggered if the first order is filled. This enables traders to enter or exit positions when certain conditions are met. For example, if trader wants to buy USD/EUR at 1.2 (its resistance level) and they see the market prices increasing rapidly, they can place two orders in the following manner –
- The first/initial order will be a limit order to buy USD/EUR at 1.21, slightly above the resistance level. This order will be executed if the market reaches the exact 1.21 level.
- The second order will be placed as a stop-loss order to sell USDEUR at 1.19, or a little below the support level. This order will be executed only if the first order is executed and the position is protected by the second (stop-loss) order.
If the initial order is not filled/executed, the second order gets automatically cancelled.
Take profit order
A take profit order allows traders to set a specific price target at which they want to lock in profits. The take profit order is usually set above the entry price level, so the trade is automatically closed if the market reaches that price. This helps them avoid turning winning trades into losing trades by not holding onto a particular trade for too long. For example, if a trader buy USD/EUR at 1.2 and expect the market to continue in an uptrend, they can set the take profit price level at 1.22. if the USD/EUR price reaches this level, the take profit order is automatically triggered, and the trade is closed*.
Good till cancelled order
A good till cancelled (GTC) order allows traders to keep an order open until it is executed, cancelled or expired. This helps them enter a trade at a specific price level without monitoring the market regularly. The strategy is primarily used to set up automated trading activities and manage open trades apart from just entering new trades. Traders can also take advantage of the price movements outside of regular trading hours by placing a GTC order. This means price changes due to news releases or economic events are automatically captured with the GTC order, and trade can be made accordingly. For example, a trader can place a GTC limit order and buy USD/EUR at 1.21. The take profit order can be set at 1.22, whereas the stop loss can be set at 1.1. This GTC order will remain active until they cancel the trade, execute it or wait for too long for the trade to expire. It typically takes around 90 to 120 days for a GCT order to expire*.
All or none order
All or none (AON) is a forex order type that specifies that in order to execute a trade, the entire order must be filled or none at all. This means the order will only be executed if there are enough buyers or sellers in the market to fulfil the sell or buy order. This helps traders manage the entire order they place is filled at a specific type, avoiding partial fills or multiple orders at different price levels. For example, if a trader wants to buy 1,000 units of USD/EUR at 1.2, but only 500 units are available at this price, the trade for the entire order will not be executed. However, if, after some time, all 1,000 units become available at a 1.2 exchange rate, their order will be executed for the specified price*.
Fill or kill order
A fill or kill order type enables traders to instruct the broker to execute the entire trade order immediately and completely or cancel it right away if it is not immediately filled. This implies that the traders receive a completely filled order at the specified price without partial fills. It is generally used during short-term trends to take advantage of price volatility. For example, if a trader want to buy USD/EUR at 1 and submit a fill or kill order to their broker for the same, the broker will execute the trade only if he or she is able to fill the entire order at the specified price immediately. However, if the broker is not able to fill the entire order immediately, their order will be cancelled, and they will have to resubmit another order at a different price.
Pending order/immediate or cancel
A pending order type in forex is an instruction that traders give to their broker to execute a trade at a specific price in the future. Pending orders are used to enter and exit markets at a later date than the current time with the aim to take advantage of the predicted price movements. The pending order remains in the broker's system until traders execute or cancel it. They can modify or cancel the trade at any time as per their choice. For example, let us suppose that after closely monitoring the market, a trader identified 1.1 as the resistance level for USD/EUR, and believe that once the market reaches this price level, the currency pair prices will reverse and start falling. To take advantage of this anticipated price movement, they place a sell limit order at 1.1, meaning that once this price is reached, the order will be triggered, and they will enter a short trade at 1.2 for USD/EUR. However, if the market does not reach this resistance level, the order will remain pending, and they can either modify or cancel it. *This is an example only and does not constitute personal advice.
What are ways to use various order types?
- Market orders are preferred when the speed of execution is more important than the price.
- Limit orders are preferred when the trader wants to enter or exit a position at a specific price or when they anticipate a price level to be reached in the future.
- Stop orders are used as a risk management tool to limit potential losses in case the market moves against the trader's position.
- Take profit orders are used to automatically close out a position when a certain profit target has been reached. They are often used to lock in gains and limit potential losses.
- If/then orders are often used to set up complex trading strategies that involve multiple orders.
- Good till cancelled orders are preferred when the trader wants to set up an active trade until a certain price level is reached.
- All or none orders can be used when the trader wants to ensure that they get the entire position they are looking for or none at all.
- Fill or kill order types are often used when the trader wants to execute a large order at a specific price level but does not want to risk only partially filling the order.
- Pending orders are used to automatically execute a trade at a specified price level in the future.
Choose the right market order for your trading strategy
Mastering the various types of forex market orders is an essential skill for traders aiming to succeed in the dynamic world of forex trading. The ability to choose the appropriate order type for a given situation can significantly impact a trader's chances of potential success in the forex market. However, don’t forget that trading forex is high risks and while there is potential for success, there can be losses. Start trading with Blueberry Markets. Sign up for a live account or try a demo account.
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