Forex Order Types

A Forex order a command from trader to broker that indicates the way or how a trader wants to enter or exit the market. Some of the most common types of orders available for entering into a position include:

  • Market Order
  • Stop Order
  • Limit Order

In a much broader sense an order can be used to do two things:

  • Buy or going Long. If we go long, we’re expecting the currency pair to rise.
  • Sell or going Short. If we go short, we’re expecting the currency pair to fall.

Market Order

A market order is an order that gives your broker the instruction to buy or to sell immediately – at the best available market price. The advantage of this type of order is that it guarantees that the order will be executed. However, the main disadvantage is that in fast-moving markets the price your order gets filled may be different from the last price quoted before the trade was entered.

Most of the times when you place a market order it will be executed at the current price and only in volatile markets, there is a danger of getting slippage. In the figure below, you have a visual representation of a typical market order:

When to use a Market Order?

When using a Market Order it doesn’t guarantee a particular price. In this regard, you only want to use a Market Order when your main objective is to get your trade filled right away.

If you missed a breakout trade opportunity and you see more evidence that the market will continue moving in the direction of the breakout ideally, you want to use a market order. This way you’ll ensure you’ll be part of the new trend that has started and profit from the move.

Limit Order

A limit order is an order that gives your broker the instruction to buy or to sell at a specific price. The advantage of this type of order is that it guarantees that your order will be filled only at the specified price.

As a general rule, for a buy limit order, the current market price is above the price one would like to buy at. Inversely, a sell limit order is an order to go short when the current market price is below the price one would like to sell at. In the figure below, you have a visual representation of a typical Limit Order:

Typically a limit order has also an expiration date attached to it. This means that your order will be live, and only be triggered inside the expiration date. Your order might not be executed if the limit price is not reached by the expiration date.

When to use a Limit Order?

For example, if the AUD/USD is trading at 0.7650 and if you want to buy on a retracement to 0.7600 – for this type of order you can use a buy limit order. Ideally, a limit order works best in a ranging market. If the price level of the AUD/USD was currently in a channel, and if you are going to buy at the support level and sell at the resistance level you could use a limit order.

Stop Order

A stop order gives your broker the instruction to buy/sell when the price is above/below the current market price. For example, if the AUD/USD exchange rate is at 0.7800 and you want to buy it at 0.7850 then for this entry order you’ll use a buy stop order.  Stop orders and limit orders are a great way to manage your trades if you don’t want to be glued to your screen the whole day.

When to use a Stop Order?

Ideally, you want to use stop order when you want to buy above resistance levels or sell below support levels. In other words, a stop order is great for breakout trading. If you’re expecting the market to break through a certain barrier we want to use a stop order.

For example, if the AUD/USD is in a strong uptrend but facing some resistance you want to place a buy stop order in anticipation of the trend resuming and the resistance giving up:

Stop Orders are also referred to as a stop loss order. A stop loss order is used to limit the potential losses from a trade.

Conclusion

Placing a trade is the way you make money on the Forex market, and in order to ensure your success in trading, you need to understand the different types of orders and how to use them. The bottom line is that when it comes to placing an order you first need to establish two things:

  • Am I trying to buy or to sell?
  • What price do I want my order to be executed at? This will determine the type of order you’ll want to use.