You can use several different types of orders to make and control your trades in forex trading. Some orders control both how you enter and how you exit the market. Learning what they all mean can go a long way toward successful trading.
Market orders are executed live on the market at the current price. You're telling the broker that you don't care about the spread as much as you care about entering the market right now. A market order can be used to open or close a trade at the market price.
Limit orders are typically those that are used to exit the market in profit. If you're going long, the limit order will be above the market price, and if you are going short, the limit order will be below the market price. Think of a limit order like a finish line. Your trade will be closed when the market price crosses the limit order, and your profit will be realized in your account balance.
Stop Orders or Stop Loss Orders
A stop order is also an exit order that will close your trade. Commonly referred to as a stop loss order or a protective stop order, this type of order is intended to limit the amount of loss incurred by your trade. A stop loss order will close your trade at a designated level of loss. Stop orders can also be used to lock in gains as your trades progress into profit. Stop losses can be painful when they're hit, but they'll keep you in the trading game longer than if they're not used.
Entry orders are those to enter the market at a specified price. It's almost impossible to monitor the market every second, so that an entry order can be handy. If you believe the market may move in a particular direction, such as a breakthrough in price that it's been touching but hasn't yet been able to break, you could use an entry limit order. When the price crosses your entry limit order, you're in the market.
Here are the four basic entry order types:
- BUY Entry limit order — placed below current market price
- SELL Entry limit order — placed above current market price
- BUY Entry stop order — placed above current market price
- SELL Entry stop order — placed below current market price
Entry orders can be a double-edged sword. The advantage is that you can enter the market when it moves while you're away or not paying attention. The disadvantage is that the market can touch your entry order and move against you, impacting the position negatively before you have a chance to evaluate the move. This is where good risk management practices come into play.
Do Your Homework
Understanding different types of forex orders and their uses is an essential basic skill. Take the time to study them and try them out using a demo account before you take the plunge.
Note: Always consult with a financial professional for the most up-to-date information and trends. This article is not investment advice, and it is not intended as investment advice.