Order Types and Positions

Overview
As a trader, you will need to use trading orders during your journey whenever buy or sell certain financial instruments. These orders will be explained in this lesson.
outcome

Different pending order types in trading.

Reading time
8.5 minutes
experience level
  • beginner Beginner

Buying and Selling Currencies


When trading Forex, the rule is to buy low and sell high. When you sell a currency pair, you are actually buying the quote currency (the second one in the pair) and selling the base (the first one in the pair). 


Long Vs. Short 


Surely you have heard traders talking about going long or short on a trade. But do you know the actual meaning of these two terms? 


Going long: It means opening a BUY position. 


Going short: It means opening a SELL position. 


Order Types


A trading order is an individual or a set of instructions given by the trader to the broker to buy or sell certain financial instruments on their behalf. These orders differ from one broker to another. Below are some of the most common types: 


Market Order: It is a request by an investor to enter or exit a trade at “market price”, meaning, immediately, and as close as possible to the price existing in the market, at the time of giving the order.


Since the price of highly liquid financial instruments is changing once or even multiple times a second, there might be a small change between the price at the time of placing the order by the investor, and the time of executing it by the broker, which is ideally less than one second. In general, the difference between the price specified in the order, and the price the order was executed at, is called slippage, and it can happen to any type of order.


Example:


If at the time the client gave a market order to buy EUR/USD to their broker and the "ask” price was 1.15750, the order will be immediately executed at, or very close to, 1.15750. Let’s say 1.15752 or maybe 1.15747 (above or below).


Limit Entry Order: It is an order placed to enter (open) a trade at a better price than the one existing in the market at the time of placing the order. “Better” is different between “buy” and “sell”. If you are placing a buy order, then obviously better is lower, because buying at a lower price allows you to make more profit in case the price goes up to a certain price. In the case of the sell order, the opposite is true, as in better is higher.


Example:


Let’s assume that the AUD/USD ask price is 0.7545, and our trader here wants to place a limit order to buy. The price should be below 0.7545, like for example 0.7520.


Or: If the USD/CAD bid price was 1.3175, a sell limit order can be placed above 1.3175, let’s say at 1.3200.   


Limit Exit Order: It is also an order placed at a better price than the market, but this time, to close the trade. So, to place a limit exit, you need to have an open position first, and then place this type of order at a better price.


Closing a position with a limit order could mean closing with profit, or closing with less loss than what was endured at the market price at the time of placing the order.


Example:


If a trader opens a sell position on EUR/USD at 1.1610, a limit exit order can be placed immediately after opening this position at any price below 1.1610, be it close like 1.1600, or far like 1.1500. Here, in both cases, if the price reaches the level specified in the order, the trade will be closed with profit.


Or:


If a buy position on GBP/NZD is opened at 1.9715, and the price moves down to 1.9665, a limit could be placed at any price above 1.9665, which includes the area between current market price 1.9665 and 1.9714, where this position is in loss. As you can see, “better” does not always mean “profit”, it can also mean a smaller loss.

 

The limit order, in all its types, is only executed if the price reaches the specified level in the order, not before that.


Stop Entry Order: This is the opposite of the Limit Entry Order, i.e. open a position when the market reaches a value that is less favorable than the current price.  One scenario of using the Stop entry order is that you want to open a position when the price is above (when going long) or below (when going short) of a significant level (support level/resistant level) because you expect the trend will continue.  


Stop-Loss Order: The stop-loss order is an exit order, meaning it closes the trade, and it is placed at a worse price than the market. This means that a stop-loss order does not have to close a trade in “loss” but perhaps at less profit than what the trade was making at the time of placing the order. In both cases, this order is considered one of the best risk management tools in financial markets in general.


Example:


A trader buys GBP/USD at 1.3650, but they only want to risk 50 pips. They place a stop order at 1.3600. In this case, the trader can place the order anywhere below 1.3650, but not above that.


Now let us assume that the trade is going in the right direction, and the price moves up to 1.3700. Now, the trader can modify the stop-loss order to anywhere below 1.3700, even in the profit zone of the trade (i.e. above 1.3650). Now, the “stop” can be moved from the initial 1.3600 level, which would have caused a loss of 50 pips, to let’s say 1.3680, which will leave this trade with a profit of 30 pips. As you see, a stop-loss order does not have to close the trade in loss, but at a “worse” result than the result that it is achieving at the time of placing the order. 


Trailing Stop: It is a stop order that keeps changing in favor of the trader as the profit increases. The trader can specify how many points the order should trail (i.e. fall behind) the best price reached for the trade. The change is automatic, it does not need the trader to do anything after placing the order. 


However, it is important to understand the numbers here. When you place a trail stop, you will be asked to specify the “points” of the “trail stop level”. No matter what instrument we are talking about, a point is defined as a change of 1 in the last digit of pricing. In the fractional pip pricing model, most currencies are priced to the fifth decimal place (to the third decimal place for JPY pairs). Therefore, the points specified in this order are the change in price, down to the fifth decimal place.


Example:


A trader buys NZD/USD at 0.69700, and places a trail stop order, specifying the trail stop level to be 100 points. Here is exactly what will happen to this trade after placing this order:


Before the profit of the trade reaches 100 points (at 0.69800): nothing is done, even if it reaches 99 points.

When the price reaches 0.69800 exactly, a stop is placed at entry level (0.69700).


As the price moves higher, and more profit is achieved, the stop is changed automatically to a level that is always 100 points less than the highest price reached. 


Let’s say the price reached 0.69851, the stop will be automatically moved to 0.69751. If the price reaches 0.69900, the stop is moved to 0.69800, and so on.


This automatic adjustment is carried out until the stop or limit is reached, and the trade is closed.


Good till Cancelled (GTC): This means that the order will be in place or “pending” until the order is canceled by the trader. This order must be monitored, otherwise, you might forget about it and find yourself in an unfavorable position.  


Good for the Day Order: This order stays active until the end of the trading day (closing time). At closing time, it is canceled automatically. 


One Cancels the Other Order (OCO): This set consists of two orders, one is a limit order, the other is a stop order. If one order is executed, the other is automatically canceled. You can place these orders to open or close positions. 


For instance, if for some reason you believe that the next move on USD/JPY will be a strong one, regardless of its direction, you can place an OCO to be ready to capitalize on the next move. Assuming that the current price is 108.70, you can place an order to buy at let’s say 109.00, and another to sell at 108.50, and link them together in a way that if one is triggered, the other is canceled. 


Lesson Complete!

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