4. Types Of Orders
To complete your view on the trading mechanics, let's cover the different order types that allow you to enter, exit and program trades. There is a wide choice of orders designed for all types of trading styles.
Orders that are executed immediately at current rates are known as market orders. For example, suppose GBP/USD is currently traded at 1.5842; if you wanted to go long at this exact price, you would click buy and your trading platform would instantly execute a buy order at that exact price.
When closing a position manually, the trader is also technically executing a market order of the same amount in the opposite direction of the open trade. To close a long GBP/USD position, the trader only has to go short the same size than the long position. This is also called an offsetting or liquidating transaction.
It's important to note that with most all broker-dealers, your profits and losses will be accrued in the currency you have your account in. For instance, if you exit a long USD/JPY trade, you are buying back Japanese Yen, but your profit or loss will be converted to the currency you have your account in with the broker-dealer, so you don't have to worry doing it.
Entry stop order
An entry stop order is an order you can preset into the platform to buy or sell at a specified price. Supposing EUR/USD is currently traded at 1.1014. and you want to buy if the price reaches 1.1100. You can either monitor the exchange rate and enter a market order manually if it reaches that price level, or program an entry stop order at 1.1100. If the price goes up to that level, your trading platform will automatically execute a buy order at that price.
The entry stop price on a buy order must be above the current ask (offer) and on a sell order it must be below the current bid. Note that not all broker-dealers guarantee you an execution at or near the stop price.
Sometimes entry orders contain a second variable: time duration. Besides the price at which you wish to buy or sell a certain currency pair, you can also specify how long the order shall remain valid.
What happens if the broker can't find a match for a position? Do they take the other side of it?
The dealer will take the other side of the trade when acting as a market maker, otherwise it will process it through the interbank market. Depending on the size of the order the broker-dealer will be able to fill it or not. But usually broker-dealers can always find a match for your position as there is one bid and ask price but thousands of participants acting through their platform. In the event the broker-dealer can't fill the order at the desired price then slippage may occur. When there is no order to be matched with then the order will be re-quoted with the next possible value.
It's an order to buy or to sell at a specified price executed at the limit price or at a better price than the market price. A sell limit order can only be executed at the limit price or higher, and a buy limit order can only be executed at the limit price or lower. Note that a limit order can possibly not be executed because the market price may quickly surpass the limit price before your order can be filled. This type of order is used as a protection from buying the currency at a too high price or selling at a too low price.
Stop Loss Order
A stop loss order is a limit order preset to close out a position automatically when the bid or offer price touches a given level with the purpose of preventing additional losses if price goes against you. In a long position the stop loss will be set below the spread, and in a short position above the spread.
A stop loss order remains active until the position is liquidated or you cancel the stop loss order. For example, if you go short USD/JPY at 107.00 you can limit your maximum loss by presetting a stop loss order at 108.00. This means if the exchange rate moves up by 100 pips, your trading platform would automatically execute a buy order at 108.00 and close out your position for a 100 pip loss.
If you have a long position instead, you may issue a stop loss order below the current exchange rate. If the market price falls through the stop loss trigger price, then the order will be activated and your long position will be automatically closed out.
Like limit losses, stop losses are useful if you don't want to sit in front of your trading platform all day. They also prevent you from losing more than what you intended to in the case the Internet connection fails or if you simply fall asleep.
A problem with stop orders is that exchange rates may move through the stop loss trigger prices in volatile market conditions, making stops impossible to execute at the preset levels. Not all broker-dealers guarantee an exact execution of the orders, and a so called "slippage" may occur. The market volatility hits extremes when key economical news are announced which can affect the exchange rates, and the probability for a slippage to happen rises if your stops are very tight.
Use your platform to place the stops, not your mind. This is a good advice especially if you are not an experienced trader. Not only a stop loss order is an electronic risk limiting device, avoiding such problems as mentioned above, but it is also a measure against your eventual doubts about the decision you took to enter the market.
You can always feel tempted to let a losing position go against you in the hope the market turns in your favor, but when that happens you are probably not solvent anymore because of the leverage effect. To avoid that harass, let the platform automatically execute your stop.
Below follow the main order execution mechanisms used in Forex trading:
Trailing Stop Loss
A trailing stop loss is a stop loss order that is linked to a position like any stop loss, but instead of being fixed at a certain price level, it has the capability to move as the position moves into profit. By raising the stop loss trigger price, partial gains on the position are locked in.
Note that stops can be manually "trailed", moving them strategically instead of automatically. That way, you can keep a stop beneath a strategic level, instead of moving it to an arbitrary location - which is often exactly what happens when using automatic trailing stops. There are certain price levels like round numbers (for example, 1.5400, 107.00 or 1.4000) or all time highs and lows where many positions are activated. Stops placed close to these levels are more likely to get hit and executed.
Take Profits Order (TPO)
The opposite of a stop loss (i.e. a stop gain). The TPO order specifies that a position should be closed out when the current exchange rate crosses a given threshold.
For a short position, the TPO order will be set below the current exchange rate, and vice versa for a long position.
Firt-in First-out (FIFO)
Good Until Canceled (GTC)
Limit orders can be good for a specified time period (hours, days, months) or "good till canceled". A GTC limit order is held open indefinitely (unless filled) and is only terminated on instructions by the account holder.
A GTC order remains active in the market until you decide to cancel it. Your broker-dealer will not cancel the order at any time. Therefore it's your responsibility to remember that you have the order scheduled.
Good For the Day (GFD)
A GFD limit order is held open for the balance of the trading day unless it is filled before then. A GFD order remains active in the market until the end of the trading day. Remember that the end of the day in Forex is usually 5P.M. EST, but in any case double check with your broker-dealer.
One Cancels the Other (OCO)
An OCO order is a combination of two limit and/or stop-loss orders at opposite ends of the spread. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Example: The price of EUR/USD is 1.0050. You want to either buy at 1.0100 in anticipation of an up move or open a sell position if the price falls below 1.0000. If 1.01005 is reached, the buy order is triggered and the sell order is automatically terminated.
You can also use this type of orders when already in an open trade. For example, if you are in a long position, the stop loss is placed below the entry price, right? In this case the OCO limit sell order would be placed above the entry price. If the base currency rate breaches the OCO trigger price then the position will automatically be sold and the original stop loss is canceled. Alternatively, if the rate falls to the stop loss threshold, then the position will be closed out for a loss and the OCO limit order terminated.
This video goes beyond the trading mechanics and aims to help you formulate a few questions regarding your motivations and expectations to become a trader. Enhancing your awareness about these subtle aspects will significantly leverage your know-how.
What you have learned from this chapter:
- Each currency has a different behavior tied to the economical and geopolitical conditions of the country issuing it.
- A margined account can be levered up, that is, currencies can be traded on cash collateral made by your initial margin (deposit).
- Because most traders do not want to make or take delivery of the currency, most forex broker-dealers automatically roll over the current value date to the next value date at each settlement time.
- Rollovers can contribute to your overall performance in a positive way.
- The cost of carry, another term for the rollover differential, is dependent on the leverage used. This is because you are paid and charged accordingly to the position size, even if you don't have this amount in your margin account.