The instructions you make in order to enter and exit a trade are called orders. There are different types of orders you can enter and it while some are basic, other orders depend on the kind of forex trading strategy you have formulated.
Following are the basic order types you can place in the forex market:
This is the order you make if you want to buy or sell at the best price. For example, if you see that the ask price of the USD/JPY is 100.20, then you will be sold the currency at that price when you make a market order.
Limit Entry Order
With a limit entry order you can buy below or sell above the market at a specified price.
Following the USD/JPY currency pair stated above as an example, if it is trading at 100.20 but you want to sell when it reaches 100.40, you can either wait in front of your PC and click on the sell market order when you see it hit 100.40 or you can use a sell limit order that will automatically put a sell order for you when trading reaches 100.40. With the sell limit order, your trading platform will issue the order for you. Basically, you use the limit entry order if you think the price will reverse when it reaches the price you’ve earmarked.
This is the reverse of the limit entry order. With this order you can buy above or sell below the market at your specified price. If the USD/JPY price is at 100.20 and the value is moving up. You think that when it reaches the resistance of 100.40 it will continue to move up. All you need to do is to issue a stop-entry order at 100.40 and an automatic buy will be made at that value. You use stop-entry orders when you think the price is going to continuously move in one direction.
A stop-loss order is what you place if you want to minimize or prevent additional losses if the price does not go your way. If the USD/JPY value is at 100.20 and you had a long position. But instead of it rising, the value started falling, you can issue a stop-loss order 100.00 that will automatically institute a sell order at that value to close your position and minimize your loss.
A stop-loss order is extremely important because it means you won’t have to diligently look at your computer to monitor the value of your chosen currency pair in order to protect yourself from additional losses. The order will do it for you.
Trailing Stop can be seen as a kind of stop-loss order but the difference is that it moves as the price fluctuates.
If you’ve decided that you want to go short on USD/JPY at 100.50 with trailing stop of 20 pips, it means your stop loss is at 100.70. If the value goes down to 100.20 this means the trailing stop will now move to 100.40.
Do remember that the stop will remain at this price. It will not widen if the price suddenly goes up and counter to your position. So, to add to the example above if the price is at 100.20, and the trailing stop is now at 100.40, and the price then moves back up to 100.35, the stop remains at 100.40. The trade remains open up until the price goes up and hits the 20 pips that you’ve set. When this happens a stop-loss order is automatically triggered and your trade is closed.
About The Author
Mario Singh owns the popular forex site Askmariosingh.com.