them as trades waiting to happen, because that’s exactly what
they are. If you enter an order and a subsequent price action
triggers its execution, you’re in the market, so be as careful as
you are thorough when placing your orders in the market.
Currency traders use orders to catch market movements
when they’re not in front of their screens. Remember: The
forex market is open 24 hours a day, five days a week. A
market move is just as likely to happen while you’re asleep or
in the shower as while you’re watching your screen. If you’re
not a full-time trader, then you’ve probably got a full-time job
that requires your attention when you’re at work. (At least
your boss hopes he has your attention.) Orders are how you
can act in the market without being there.
Experienced currency traders also routinely use orders to:
- Implement a trade strategy from entry to exit
- Capture sharp, short-term price fluctuations
- Limit risk in volatile or uncertain markets
- Preserve trading capital from unwanted losses
- Maintain trading discipline
- Protect profits and minimize losses
We can’t stress enough the importance of using orders in currency
trading. Forex markets can be notoriously volatile and
difficult to predict. Using orders helps you capitalize on shortterm
market movements while limiting the impact of any
adverse price moves. While there is no guarantee that the use
of orders will limit your losses or protect your profits in all
market conditions, a disciplined use of orders helps you to
quantify the risk you’re taking and, with any luck, gives you
peace of mind in your trading. Bottom line: If you don’t use
orders, you probably don’t have a well-thought-out trading
strategy — and that’s a recipe for pain.
Types of orders
Multiple types of orders are available in the forex market.
Bear in mind that not all order types are available at all online
brokers, so add order types to your list of questions to ask
your prospective forex broker.
Take-profit orders
Don’t you just love that name? An old market saying goes,
“You can’t go broke taking profit.” Use take-profit orders to lock
in gains when you have an open position in the market. If
you’re short USD/JPY at 117.20, your take-profit order will be
to buy back the position and be placed somewhere below that
price, say at 116.80 for instance. If you’re long GBP/USD at
1.8840, your take-profit order will be to sell the position somewhere
higher, maybe 1.8875.
Limit orders
A limit order is any order that triggers a trade at more favorable
levels than the current market price. Think “Buy low, sell
high.” If the limit order is to buy, it must be entered at a price
below the current market price. If the limit order is to sell, it
must be placed at a price higher than the current market price.
Stop-loss orders
Boo! Sound’s bad doesn’t it? Actually, stop-loss orders are critical
to trading survival. The traditional stop-loss order does
just that: It stops losses by closing out an open position that
is losing money. Use stop-loss orders to limit your losses if the
market moves against your position. If you don’t, you’re leaving
it up to the market, and that’s dangerous.
Stop-loss orders are on the other side of the current price
from take-profit orders, but in the same direction (in terms of
buying or selling). If you’re long, your stop-loss order will be
to sell, but at a lower price than the current market price. If
you’re short, your stop-loss order will be to buy, but at a
higher price than the current market.
Trailing stop-loss orders
You may have heard that one of the keys to successful trading
is to cut losing positions quickly, and let winning positions
run. A trailing stop-loss order allows you to do just that. The
idea is that when you have a winning trade on, you wait for
the market to stage a reversal and take you out, instead of
trying to pick the right level to exit on your own.
A trailing stop-loss order is a stop-loss order that you set at a
fixed number of pips from your entry rate. The trailing stop
adjusts the order rate as the market price moves, but only in
the direction of your trade. For example, if you’re long EUR/CHF
at 1.5750 and you set the trailing stop at 30 pips, the stop will
initially become active at 1.5720 (1.5750–30 pips).
If the EUR/CHF price moves higher to 1.5760, the stop adjusts
higher, pip for pip, with the price and will then be active at
1.5730. The trailing stop continues to adjust higher as long as
the market continues to move higher. When the market puts
in a top, your trailing stop will be 30 pips (or whatever distance
you specify) below that top, wherever it may be.
If the market ever goes down by 30 pips, as in this example,
your stop will be triggered and your position closed. So in this
case, if you’re long at 1.5750 and you set a 30-pip trailing stop,
the stop initially becomes active at 1.5720. If the market never
ticks up and goes straight down, you’ll be stopped out at
1.5720. If the price first rises to 1.5775 and then declines by 60
points, your trailing stop will have risen to 1.5745 (1.5775–30
pips) and that’s where you’ll be stopped out. Pretty cool, huh?
One-cancels-the-other orders
A one-cancels-the-other order (more commonly referred to as
an OCO order) is a stop-loss order paired with a take-profit
order. An OCO order is the ultimate insurance policy for any
open position. Your position stays open until one of the order
levels is reached by the market and closes your position.
When one order level is reached and triggered, the other
order automatically cancels.
Let’s say you’re short USD/JPY at 117.00. You think if it goes up
beyond 117.50, it’s going to keep going higher, so that’s where
you decide to place your stop-loss buying order. At the same
time, you believe that USD/JPY has downside potential to
116.25, so that’s where you set your take-profit buying order.
You now have two orders bracketing the market and your risk
is clearly defined. As long as the market trades between 116.26
and 117.49, your position remains open. If 116.25 is reached
first, your take profit triggers and you buy back at a profit. If
117.50 is hit first, then your position is stopped out at a loss.
OCO orders are highly recommended for every open position.
Contingent orders
A contingent order is a fancy term for combining several types
of orders to create a complete currency trade strategy. Use contingent
orders to put on a trade while you’re asleep, or otherwise
indisposed, knowing that you’re contingent order has
all the bases covered and your risks are defined. Contingent
orders are also referred to as if/then orders. If/then orders
require the If order to be done first, and then the second part
of the order becomes active, so they’re sometimes called
If done/then orders.
The key feature of most brokers’ order policies is that your
orders are executed based on the price spread of the trading
platform. That means that your limit order to buy is only filled
if the trading platform’s offer price reaches your buy rate. A
limit order to sell is only triggered if the trading platform’s bid
price reaches your sell rate.
In practical terms, let’s say you have an order to buy EUR/USD
at 1.2855 and the broker’s EUR/USD spread is 3 pips. Your buy
order will only be filled if the platform’s price deals 1.2852/55.
If the lowest price is 1.2853/56, no cigar, because the broker’s
lowest offer of 56 never reached your buying rate of 55. The
same thing happens with limit orders to sell.
Stop-loss execution policies are slightly different than in
equity trading.
- Stop-loss orders to sell are triggered if the broker’s bid price reaches your stop-loss order rate. In concrete broker’s lowest price quote is 1.2820/23, your stop will be filled at 1.2820.
- Stop-loss orders to buy are triggered if the platform’s offer price reaches your stop-loss rate. If your stop order to buy is at 1.2875 and the broker’s high quote is 1.2872/75, your stop will be filled at 1.2875.
The benefit of this practice is that some firms will guarantee
against slippage on your stop-loss orders in normal trading
conditions. (Rarely, if ever, will a broker guarantee stop losses
around the release of economic reports.) The downside is that
your order will likely be triggered earlier than stop-loss orders
in other markets, so you’ll need to add in some extra cushion
when placing them on your forex platform.
Source: Currency Trading For Dummies
