As you may already know if you have been reading what we share at the Accuindex Academy, the forex market operates on a 24/7 timeline. This means that the value of your positions or investment can vary throughout the day, and this adds a lot of pressure if you’re constantly needing to monitor your positions. This is where automation comes in. Forex or market orders refer to automated tools which can enable forex traders (or any trader of securities, such as company shares) to manage their trades almost passively.
In this post, we are going to look at some of the most common or basic types of forex orders that you need to know in order to start trading forex.
This is one of the simplest and most common types of forex orders available to traders. It is an instruction to buy or sell a currency pair at the price indicated at that moment. A clear way to understand this is to think of any ecommerce store where you see a price for an item and an accompanying “buy now” button. Clicking that button enables you to buy the desired item at the quoted price.
However, market orders may not be as precise as the buy now buttons on online store sites. This is because of what we technically refer to as “slippage.” Forex markets are volatile, and the few seconds it may take to execute your market order may result in the price going up or down, hence your order can be executed at a lower or higher price than you had wanted when you entered the order. Slippage can favor you, or it can go against you.
The basic types of forex orders also include pending orders. This type of order is an instruction to enter a long or short position (buy or sell) once the market conditions reach the parameters you would like. For example, if the CAD/USD pair is trading at 1.2140, you can enter a pending order to buy the pair once the price rises to 1.2150. Similarly, you can enter a pending order to sell in case the price drops to a level that you think marks a turning point in the current trend of the pair.
Pending orders save you from having to sit in front of your computer waiting for the perfect moment to open a trading position. As the pending order awaits the conditions you have set in order to be executed, you can go take a swim, play golf or even play video games on the same computer that you use to trade!
Trailing Stop Order
A trailing stop order is an order which comes with a dynamic instruction to keep locking in your profits or minimize your losses. As the price of the currency pair you are trading moves, so does the point at which the trailing stop order can close the position.
For example, you can set the trailing stop order to be 10% below the market price. As the price goes higher, so will the level of this trailing stop order. Once the market drops by more than 10%, the trailing stop will close your position and lock in the gains you made or minimize the loss you can make.
Stop Loss Orders
As you may have guessed, the stop loss order is in a way similar to the trailing stop order. Both are intended to minimize how much you can lose when you have an open position. The difference between those two types of forex orders is that one is dynamic while the other is fixed. The stop loss order is fixed at a given price while the trailing stop tracks the price as it moves.
A stop loss order protects you from suffering a huge loss in case a trade goes against you. It also serves to minimize emotional decisions, such as waiting for too long to pull the plug on a trade that isn’t going as you had expected.
Take Profit Order
This is another type of order in forex trading that you need to know. The take profit order sets a profit level which will trigger an automated exit from the position you have opened. For example, if the USD/EUR pair is trading at 1.2030, you can initiate a take profit order which will close once the price moves up to the point you wish to take the profits you have made – such as at 1.2055 if you were buying the USD/EUR pair in the example above.
While some traders think that take profit orders limit them from benefiting from a favorable trend, others say that prices can change direction suddenly and dramatically, so it is better to avoid excessive greed and take a pre-determined amount of money in profit.
There are many other types of forex orders, such as the good till cancelled order, order cancels other order, good for the day order, one triggers the other order, and so many more. It is wise for you as a forex trader to read up on all those different order types before you select the ones which are ideal for your trading toolkit depending on your level of experience, trading style or even risk appetite.
High-Risk Investment Warning: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial adviser if you have any doubts.