What is the first step when you start trading in Forex market? You have to open or close your position in the market. You can do this by placing orders with your brokers or on your respective trading platforms. When you start trading you will get to know that there are various order types offered by different brokers. Following are the order types which are offered by most Forex brokers:
- Market Orders
- Limit Orders
- Entry Orders
- Stop Loss Orders
- Trailing Stop Orders
Please note there are other order types as well which might be offered by your broker.
There are basically three classifications of the order types. Various order types fall into one of the below mentioned three categories.
A market order is the order to buy or sell at the current price quoted in the market. Current market price also known as the spot price. Thus market orders are executed immediately as soon as they are placed. Typically day traders who want to enter and exit the market quickly make use of market orders.
These orders can be set for a price different from the current market price. Whenever the currency trades on the selected price, the entry order you placed would be executed. This will in turn open a new position for you in the market. So, whenever you want to execute the trade depending upon a specific point you can make use of the entry order. Good thing is that you don’t have to be in front of your trading software to execute the trade when the price reaches the desired point. There are two types of entry orders:
- Entry Limit Orders
Entry limit orders are placed when trader expects the price to bounce back after reaching a particular level. When buying a currency pair, the entry limit order will be placed at a price below the current market price. When selling the pair, the entry limit order will be placed above the current market price.
In the example below, you expect the prices to go high, but before it goes high you anticipate that the price would go down to a particular price level before going up. Thus you place the buy entry limit order at the price below the market price.
- Entry Stop Orders
Entry Stop orders are placed when the trader expects that price would continue in the same direction. Thus traders place the entry stop orders at a price which is lesser than the current price. When buying a currency pair, the entry stop order will be placed above the current market price. While selling a currency pair, the entry stop order will be placed below the current market price.
In the example below, you expect the prices to continue to rise after a break at a particular price level. Thus you place the buy entry limit order at the price well above the market price.
Stop / Limit Orders
You know from above that Stop/Limit orders are actually entry orders. To summarize we have just restated here.
Stop order works in such a way that your order will be executed only when the price reaches the order price (stop price). A limit order sets a limit on the price at which you are willing to trade. This means if you are buying a currency you can set a limit such that you would buy it if the price reached or goes below it (limit price).
Once you start trading, you will get familiarized with the various order types. Order types lets your broker fulfill your orders according to your specifications in the orders. Most of the brokers offer demo account which can be used to place these orders and test your trading strategy. This helps you gain confidence when you do real trade.