Forex Orders Types
Forex Trading is the art of making a good amount of money by investing in the currencies of different nations. Currency trading may result in profit or losses depending on your approach and execution. Therefore, knowledge of forex orders is essential to place trade efficiently. In this article, we will learn about different forex order types, their key features, pros and cons. It will help you to make maximum money in the market and eliminate the chances of huge losses.
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Forex Orders are specified instructions sent by a trader to the broker to buy or sell currencies based on the predefined criteria.
Market orders are the trading order used to buy or sell currencies immediately at the best available price or current market price.
Limit orders are the trade order used to buy or sell financial assets at the desired price at a later time.
- Buy Limit Order
- Sell Limit Order
Stop loss is a market order used to close a trade and limit the losses when the market moves against the trader’s prediction and reaches a specified level.
What are forex orders?
Forex Orders are specified instructions sent by a trader to the broker to buy or sell currencies based on the predefined criteria.
In simple words, a Forex order is an offer defining how you will enter or exit a trade in order to maximize the potential returns and eliminate the chances of huge losses.
The main aim of forex order is to manage the trade based on the current market conditions by analyzing and continuously watching the market conditions.
Types of order in Forex
There are different types of orders a trader can use to buy or sell currencies based on the trading strategies, risk factor, leverage ratio, time frame, etc.
Forex order is a crucial element of trading, and it can directly affect your overall profit or loss. Let us study the popular forex order types with examples to help you in selecting the best.
Market orders:
These are the most basic and widely used forex order types. As the name suggests, market order is used to buy or sell currencies immediately at the best available price or current market price.
Pros
- Best for scalpers or day traders.
- Quick and Easy Execution.
Cons
- Not suitable for the illiquid market.
- Lack of control on trade execution
Example: Suppose a trader is trading a EUR/USD pair. The bid and ask price of the pair are 1.1120 and 1.1125. So, using market order in forex, he can buy the pair at 1.1125 and sell it at 1.1120.
Limit Order:
This is also known as a pending order. In contrast to market orders, limit orders are executed at the desired price of a trader at a later time. This type of order is only executed when the price reaches your specified level or better.
Pros
- Complete control of trade Execution.
- Protect traders against unexpected price turns.
- Enables traders to trade with the right approach
Cons
- Chances of Non-execution.
- Slow or late execution.
Types of Pending Orders
Stop Loss Order:
This order is used to buy a currency pair at or below the specified price. Suppose the current market price of EUR/USD is 1.1120. A trader placed a buy limit of 1.1100. In this case, the order will execute when the price reaches 1.1100 or below.
Sell Limit Order:
This order is used to sell a currency pair at or above a specified price. Suppose the current exchange rate of EUR/USD is 1.1120. A trader placed the sell limit of 1.1150. In this case, the order will execute when the price reaches 1.1150 or above.
Stop Order:
These are amongst the most popular forex order types and are quite similar to limit orders. It can be used to both enter or exit the market.
Pros of Stop Order
- Act as a risk management tool.
- Best for Emotional Management and maintaining right trading psychology.
Cons of stop order
- Stop order may lead to premature existence.
- Predetermined levels may not match the current market conditions.
Types of Stop Order
Stop entry:
These order stops the execution until the price is at the specified level. There are two types of orders: Buy and sell stop orders.
Suppose the current market price of the EUR/USD pair is 1.1120. A trader believes that if the price reaches 1.1125, it will rise further. So, in this case, he will set a buy-stop forex order till the price reaches 1.1125.
Suppose the current market price of the EUR/USD pair is 1.1120. A trader believes that if the price reaches 1.1115, it will further fall. So, in this case, he will set a sell-stop order till the price reaches 1.1115.
Stop Loss Order:
This order is used to close a trade and limit the losses when the market moves against the trader’s prediction. It is an essential tool for risk management.
A trader sets the stop loss level based on the amount he can afford to lose. Under this, when the price reaches a stop loss level, the trade will automatically close.
Suppose a trader buys a EUR/USD pair at 1.1120 and sets the stop loss level at 1.1115. However, the market moved against him, and the price fell to 1.1110.
In this case, the trader set the stop loss level at 1.1115, so the trade was automatically closed when the price is at 1.1115. That’s how stop loss limits the potential losses.
Take Profit Order:
It is one of the popular forex order types that aims to lock the potential gains from trade. Take profit order is used to close a position at a profitable state.
Suppose a trader buys a EUR/USD pair at 1.1120 and takes profit level at 1.1130. The price reaches 1.1140 and then falls to 1.1118. In this case, even after the unexpected price fluctuation, the trader makes a profit. The trade is automatically closed when the price reaches 1.1130 due to the use of take profit order.
Pros
- Act as a tool to safeguard your profit.
- It helps in maintaining consistency in trading.
Cons
- It may limit the profit opportunities.
- The rigid level may lead to a premature exit.
Wrapping Up
We have understood different forex order types with their features, advantages and disadvantages. Traders with a lack of market knowledge generally go with the market order or use any of the above.
However, that’s not the right way of placing a trade in the currency market. Remember, trade execution directly affects trade outcomes. Therefore, a trader should first understand market order types; you can also go for a demo account for a better understanding of these orders.
A trader should consider the trading strategy, time frame, market conditions, risk-to-reward ratio, currency pair and other factors to select the right order type.
Also, order levels like entry, exit, stop loss and take profit should be set after a detailed study. Order management increases the chances of efficient execution and positive outcomes, so trade accordingly.