Although it may seem to make life a little bit complicated for the Forex trader, the ability to place buy and sell orders in a variety of different forms allows traders to widen their trading strategy, while at the same time protecting themselves against undue losses.
One of the beauties of the Forex market is that, when it comes to buying and selling, traders have considerable flexibility in the manner in which they place their orders, allowing them to both maximize their profits and limit their losses.
Market Order
The simplest order is a market order in which the trader buys or sells a currency pair at the current market price. Because of the size of the market and its high liquidity there is very little slippage in the market and market orders are essentially guaranteed.
Limit Order
A limit order (sometimes referred to as a take profit order) allows the trader to specify a price at which he will take his profit and close his position. For example, if a trader has bought GBP/USD at 1.9430 he could place a limit order at 1.9530. If the price then subsequently reached this level his position would be closed and he would take his profit.
Stop Loss Order
A stop loss order is essentially the same as a limit order but is designed to indicate the maximum loss that a trader is prepared to take in a position. In the previous example the trader might place a stop loss order at 1.9410 thus limiting his losses to 20 pips should the market run against him.
Entry Order
Entry orders are orders that will only be filled if the market meets certain conditions specified in the order and are divided into limit entry orders and stop entry orders.
Limit Entry Orders
Suppose the current market price for the GBP/USD is 1.9430-35. In other words a trader can enter the market to sell at 1.9430 or buy at 1.9435. In this instance a trader could place an order to sell above the current market price at a level of say 1.9440 and this order would only be filled if the market price actually reached this level. Alternatively, he could place an order to buy at a price that is below the current market price - in this case below the buying price of 1.9435. So, if the trader placed a limit entry order to buy at 1.9420 this order would only come into effect if the price dropped to this level.
Limit entry orders are normally used when a trader believes that a currency is trading within an upper and lower range, out of which it is not going to break, and is looking for a reversal in the currency's price movement.
Stop Entry Orders
A stop entry order is often used when a trader believes that a currency which has been trading within a range is about to break out of that range and wishes to buy at a price above the current market place, or alternatively to sell at a price that is below the current market price.
For example our GBP/USD trader who can enter the market to buy at 1.9430 or to sell at 1.9435 could place an order to sell at say 1.9425. In this case the trader expects the currency to reach this level and then to continue to fall. Alternatively, he could place an order to buy at say 1.9440 again expecting the market to reach this level and continue on in the same direction.
Stop entry orders are normally used by traders who are anticipating large movements in the market.
This wide variety of orders gives traders considerable flexibility and, in particular, allows them to place orders and walk away from the market knowing that they have protected themselves to a certain extent from unexpected price movements and limited any potential losses.
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