Understanding Order Types

Regardless of how you are accessing the FX market, be it through MT4, MT5, cTrader or your Brokers proprietary (in-house) trading platform, you will have access to many different order types. This can be overwhelming to someone new to trading so here are the most common order types you will come across and a description as to how they should work:

Limit Order

The most basic type of order where you are in control as to where you either buy or sell a currency pair. Limit refers to the actual price you are willing to either buy (Buy Limit) or sell (Sell Limit). When you place a limit order to buy, the currency pair is eligible to be purchased at or below your limit price, but never above it. Conversely; when you place a limit order to sell, the currency pair is eligible to be sold at or above your limit price, but never below it.

Market Order

A market order is used to buy or sell a currency pair at the next available price. Most platforms allow you to use a single/double mouse click on the displayed bid or offer to execute your trade. If you are trading on a Fixed Spread you should receive the price you traded on from your broker. If, however, you are trading on a variable (sometimes called ECN or STP) spread you are likely to be “filled” at a Volume Weighted Average Price (VWAP) which is likely to be different from the price you “clicked” on. So it is important to know what “type of market” you are trading in/on!

Stop-Loss Order

Stop-Loss orders are generally used to protect a profit or to prevent further loss if the price of a currency pair moves against you. This type of order automatically becomes a Market Order (see above) when the stop price is reached. So there is no guarantee that your order will be executed at the stop price. It is important for traders to understand that major economic news/events or market conditions can have a significant impact on the FX markets. Invariably this results in increased volatility and spreads widening which could result in a stop loss order being executed at a price that is dramatically different than where your stop loss price was entered at. It is worthwhile understanding how your broker “handles/treats” Stop-Loss orders – you will find some brokers that will “guarantee” your Stop-Loss for a fee!

Stop-Limit Order

Typically a Stop-Limit order automatically becomes a “Limit Order” (see above) when the stop price is reached. Like any limit order, a stop limit order may be filled in whole, in part, or not at all, depending on the volume available on offer/bid at the time. Rather than used to protect a profit or minimize a loss a Stop-Limit order is typically used to enter a position when a market has broken through support levels (moving lower) or broken through resistance levels (moving higher).

Nota Bene: Buy stop loss and buy stop limit orders must be entered at a price which is above the current market price. Sell stop loss and sell stop limit orders must be entered at a price which is below the current market price.

Trailing Stop Order

Trailing Stop Orders adjust automatically when market conditions move in your favour, and can help protect profits while providing loss protection. With a Trailing Stop Order, you do not have to constantly adjust for price changes instead the trading system does it for you. For example; you sell 1 lot of EUR/USD at 1.1165 with a trailing stop of 20 pips attached to it. If the market goes against you (moves higher) your stop will get triggered if the market goes above 1.1185 (1.1165 plus 0.0020pips). However, if the market moves in your favour (moves lower) your Trailing Stop moves with the market. So if the market drops to 1.1110 your trailing stop will be 20 pips away, or at 1.1130 (1.1110 plus 0.0020 pips). Now if the market reverses higher your Trailing Stop will get triggered above 1.1130 and you will have a 35 pip gain. It is important to note that a Trailing Stop is similar to a Stop-Loss order in that when “triggered” it becomes a Market Order i.e. executing at the next available price – so be wary of volatile market conditions as you will likely get “filled” at a worse price than you thought!

The above are examples of “typical” standard order types available on most Trading Platforms. Does your Broker have an order type you do not understand? Or is there a particular order type you would like more information on? If so please let us, at FxZoo, know and we will be happy to provide you with an explanation.

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