Types of Orders in Forex Trading. How to use them effectively?
When trading Forex on your MetaTrader 4 or MetaTrader 5 platform, you can choose from several order types. Traders need to understand and use these orders correctly in order to maximize their profits and limit their losses. This will help them become successful Forex traders in the long term. In this article we will explain some of the order types which are most widely used: Market Order, Stop Loss Order and Take Profit Order.
Market Order – Instant Execution
Market Order is very common and is used when you want to buy or sell a currency pair immediately, at the current market price. This order type can be used when you want to open a new position and/or when you want to close it. Before you place your order you will see two prices: Buy and Sell. When you want to buy a currency pair your order will be executed at the Buy (Ask) quote. If want to sell a currency pair your order will be executed at the Sell (Bid) quote. Once you’re ready to place a market order, the order will be opened at the current price at the broker’s server.
Stop Loss Order
The Stop Loss order is probably the most important order type in terms of risk management. It allows you to set a price level beyond which you want your order to be closed, in case the market goes against you. Stop Loss is used to prevent further losses and you should set a Stop Loss level according to your investment and risk management strategy. Once set, this order remains active until you cancel it or until it’s executed. Stop losses are preferred by a great number of Forex traders, and especially by those who do not want to monitor their trades constantly.
Example of a Stop Loss:
Let’s say you have bought USD/CAD at 1.0495 and you want to minimize your potential losses by setting a Stop Loss at 1.0470. This means that if the price goes in the wrong direction, it can drop by a maximum of 25 pips before your order is closed automatically. This way you have protected yourself against a loss than can be much larger than the one that you have just suffered.
Setting Stop Loss Levels:
The Stop Loss quote you set must differ from the market price by at least 3 pips. In the example above, the Stop Loss level can be 1.0492 or lower if you have bought USD/CAD with a market price at 1.0495. On the other hand, if you have sold USD/CAD, the Stop Loss lever should be 1.0498 or higher, if its market price is 1.0495.
Take Profit Order
A Take Profit order is used to secure a certain profit when the market is going in your direction. This means that if you have an open position which is profitable, you can set a certain Take Profit level which once it’s reached your position will be closed and you will make a certain profit. This type of order is most commonly used when we do not know whether a trend will continue beyond a certain point and we want to make a profit.
Example of Take Profit:
Let’s use the same example and say you have bought USD/CAD at 1.0495 and you want to generate a profit of 40 pips, in this case you will set a Take Profit at 1.0535. This means that if the market goes in your direction and USD/CAD reaches 1.0535, the Take Profit order will be automatically executed and you will make a profit of 40 pips. This way you have secured yourself a sure profit. Although there is a chance that the price of USD/CAD will continue to increase, there is also a possibility that it will reverse and you would have made less than 40 pips profit or even incurred a loss.
Setting Take Profit Levels:
The Take Profit quote you set must differ from the market price by at least 3 pips. In the example above, the Take Profit level can be 1.0498 or higher if you have bought USD/CAD with a market price at 1.0495. On the other hand, if you have sold USD/CAD, the Take Profit lever should be 1.0492 or lower, if its market price is 1.0495.
No matter if you are trading Forex, CFDs on shares, indices, oil, gold, or other instruments, you can use different order types during your trading. Beginner traders can use a demo account to understand and master the order types, and then can switch to a live account.