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The placement of orders in the market saves the trader the time and tedious job of monitoring market price for levels and also ensures that he does or implements what he intends to do. When placing an order with the market maker, it is very important to make sure you are placing your order properly to avoid easily made costly errors.
Market Order
This is an order to buy or sell a given currency at the current market price. This means that the trader will be buying at the “current” ask or selling at the “current” bid that is quoted. The market order can be used to enter or exit trades. When placing a market order, the currency trader specifies the currency pair that he wants to buy or sell and the number of lots or contracts he wants to trade.
With most currency trading platforms, this order is placed with a single click and is executed instantly at the current rate quoted.
Often small market makers are unable to fill market orders instantly and usually re-quote traders. This can be a major source of problems as unnecessary costs of trading are incurred that can affect performance over time and the profitability of each trade.
However, this type of order is very popular with certain trading strategies i.e. strategies which react to market conditions and require instantaneous execution of a trading position, ether to enter or exit. Therefore it is important to make certain you are trading through a firm that have the necessary credit lines within the Interbank market to attract large hedge funds and money managers as clients. This will ensure you can obtain the necessary liquidity required to execute market orders regardless the size, with no hassle.
Open a position at the current market rate example:
Image source: Forex Capital Markets
Limit Order
This is an order to buy or sell a given currency at a pre specified exchange rate or better, and can be used to enter or exit trades. It “limits” the price at which you are willing to trade at. When a Buy Limit order is placed, the trade cannot be executed at a price that is higher than the specified limit price. Therefore the buy limit is placed below the current market price. It can be used to obtain a better entry price when looking to go long, or used to close out or exit an existing short position at a profit.
When a Sell Limit order is placed, the trade cannot be executed at a price that is lower than the specified limit price. Therefore the sell limit is placed above the current market price. It can be used to obtain a better entry price when looking to go short, or used to close out or exit an existing long position at a profit. When using limit orders to exit existing trading positions, long or short, it is usually associated with pre-determined trading targets.
Stop Order
This is also an order to buy or sell a given currency at a pre specified exchange rate and can also be used to enter or exit trades. It is activated when the specified exchange rate, in this case the stop price, is reached. This is a very useful order, in that it is placed on the opposite side of the current market price than the limit order.
When a Buy Stop order is placed, the order cannot be placed at a specified price that is lower than the current market price. Therefore the buy stop is placed above the current market price.
In this way it can be used to enter a new long position when the price of a given currency breaks above, “a price break-out”, a certain rate or it can be used to limit a loss in an existing short position. When a Sell Stop order is placed, the order cannot be placed at a specified price that is higher than the current market price. Therefore the sell stop is placed below the current market price.
In this way it can be used to enter a new short position when the price of a given currency breaks below, “a price break-down”, a certain rate or it can be used to limit a loss in an existing long position. As briefly mentioned above the stop order can also be used to stop a loss or protect profits, when the price of a currency moves against a trading position. This is why it is also referred to as a "Stop Loss" or “Protective Stop” order.
If a trader that is looking to go long an exchange rate, wanted to protect against the possibility of a large loss, he would, after careful evaluation place a sell stop order at a strategic “safe” spot below his entry price as soon as he entered the long position. This would then act as a “protective” stop loss and guard the trading account against an unprotected adverse movement in the exchange rate.
In the same way, if a trader who is already holding a short position in an exchange rate and is making money in the trade or what is referred to as been “in the money”, wanted to protect some of the profits already showing but still have the opportunity to benefit from a further fall in the rate, would, after careful evaluation place a buy stop order at a strategic “safe” spot, above the current price but below his short entry level, thereby “locking in” profit if stopped out.
This trading technique is referred to as a trailing stop or a Ratchet Stop and is incorporated into the strategies of many successful traders.
At all times remember, “Always trade with the probability and protect against any possibility” |
