Types of Forex Orders - Part Two

Limit orders versus stop orders

New traders often confuse limit orders with stop orders because both specify a price.

Both types of orders allow traders to tell their brokers at what price they’re willing to trade in the future.

The difference lies in the purpose of the specified price.

A stop order activates an order when the market price reaches or passes a specified stop price.

For example, EUR/USD is trading at 1.1000, you have a stop entry order to buy at 1.1010. Once the price reaches 1.1010, your order will be executed. But it doesn’t necessarily mean that your buy order was filled at 1.1010. If the market was moving fast, you might’ve been filled at 1.1011.

Basically, your order can get filled at the stop price, worse than the stop price, or even better than the stop price. It all depends on how much price is fluctuating when the market price reaches the stop price.

Think of a stop price simply as a threshold for your order to execute. At what exact price that your order will be filled at depends on market conditions.

A limit order can only be executed at a price equal to or better than a specified limit price.

For example, EUR/USD is trading at 1.1000, you have a limit entry order to buy at 1.1009. Your order will not be filled unless you can get filled at 1.0009 or better.

Think of a limit price as a price guarantee. By setting a limit order, you are guaranteed that your order only gets executed at your limit price (or better).

The catch is that the market price may never reach your limit price so your order never executes.

In the previous example, EUR/USD may only fall down to 1.1009 before skyrocketing. So even though you wanted to go long EUR/USD, your order was never executed since you were trying to enter a long position at a cheaper price. You watch the EUR/USD rise without you. 😭

This is the tradeoff when using a limit order instead of a market order.

Weird Forex Orders

“Can I order a grande extra hot soy with extra foam, extra hot split quad shot with a half squirt of sugar-free white chocolate and a half squirt of sugar-free cinnamon, a half packet of Splenda and put that in a Venti cup and fill up the “room” with extra whipped cream with caramel and chocolate sauce drizzled on top?”

Oops, wrong weird order.

Good ‘Till Cancelled (GTC)

A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore, it is your responsibility to remember that you have the order scheduled.

Good for the Day (GFD)

A GFD order remains active in the market until the end of the trading day.

Because foreign exchange is a 24-hour market, this usually means 5:00 pm EST since that’s the time U.S. markets close, but we’d recommend you double-check with your broker.

GFC and GTC are known as “time in force” orders.

The “time in force” or TIF for an order defines the length of time over which an order will continue working before it is cancelled. Think of it as a special instruction used when placing a trade to indicate how long an order will remain active before it is executed or expires.

One-Cancels-the-Other (OCO)

An OCO order is a combination of two entry and/or stop-loss orders.

Two orders are placed above and below the current price. When one of the orders is executed the other order is cancelled.

An OCO order allows you to place two orders at the same time. But only one of the two will be executed.

Let’s say the price of EUR/USD is 1.2040. You want to either buy at 1.2095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.1985.

The understanding is that if 1.2095 is reached, your buy order will be triggered and the 1.1985 sell order will be automatically cancelled.

One-Triggers-the-Other (OTO)

An OTO is the opposite of the OCO, as it only puts on orders when the parent order is triggered.

You set an OTO order when you want to set profit taking and stop loss levels ahead of time, even before you get in a trade.

For example, USD/CHF is currently trading at 1.2000. You believe that once it hits 1.2100, it will reverse and head downwards but only up to 1.1900.

The problem is that you will be gone for an entire week because you have to join a basket weaving competition at the top of Mt. Fuji where there is no internet.

In order to catch the move while you are away, you set a sell limit at 1.2000 and at the same time, place a related buy limit at 1.1900, and just in case, place a stop-loss at 1.2100.

As an OTO, both the buy limit and the stop-loss orders will only be placed if your initial sell order at 1.2000 gets triggered.

An OTO and OTC order are known as conditional orders. A conditional order is an order that includes one or more specified criteria.

In conclusion…

The basic forex order types (market, limit entry, stop entry, stop loss, and trailing stop) are usually all that most traders ever need.

To open a position, the following pending orders may be used:

• “Buy stop” to open a long position at the price higher than the current price
• “Sell stop” to open a short position at the price lower than the current price
• “Buy limit” to open a long position at the price lower than the current price
• “Sell limit” to open a short position at the price higher than the current price

Here’s a cheat sheet (current price is the blue dot):

Unless you are a veteran trader (don’t worry, with practice and time you will be), don’t get fancy and design a system of trading requiring a large number of forex orders sandwiched in the market at all times.

This is always a tradeoff when using a limit order instead of a market order.

• For example, if you want to buy “right now,” you’ll have to pay the higher asking price. This is called a “market order” as it will trade at whatever the market price is.
• If you prefer to save some money, you’ll need to use a “limit order”.
• The problem with being patient is sometimes the price continues to go up and your limit order is never filled.
• If you still want to get in a trade, you have to either enter a market order or update your limit order. This now means you’ll end up paying (even) more than the original ask price.

Stick with the basic stuff first.

Make sure you fully understand and are comfortable with your broker’s order entry system before executing a trade.

Also, always check with your broker for specific order information and to see if any rollover fees will be applied if a position is held longer than one day.

Keeping your ordering rules simple is the best strategy.

If you missed part one, please refer to Part One for more information.

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Reprinted from babypips, the copyright all reserved by the original author.