In forex trading, selecting the proper order type for the job is an important task. No matter if one is a short-term scalper or long-term investor, the way in which the market is entered and exited plays a key role in sustaining profitability. After all, achieving optimal trade execution depends greatly upon how efficiently one interacts with the market itself.
Types Of Forex Orders
The world's financial markets are competitive atmospheres, facilitating the activity of millions of participants. According to the Bank of International Settlements (BIS, 2019), the forex marketpalce is the single largest trading venue, accounting for more than US$6 trillion in average daily turnover. For retail participants, this means deep markets and robust liquidity―two elements vital to successful trade.
However, the forex market's unparalleled market depth emphasizes the need for selecting order types that complement a chosen trading strategy. In this regard, orders may be classified in two ways:
- Conventional: Conventional order types are traditional methods of entering and exiting the forex market. Among this classification are market, limit, stop market and stop limit orders.
- Hybrid: Hybrid orders are those that combine multiple strategic functions to aid in trade execution. Two examples of hybrids are trailing stop losses and multi-bracket orders. These are more advanced order types, often custom-programmed and automated to satisfy an individual trader's needs.
Conventional Order Types
Conventional order types are implemented by retail forex traders around the globe on a daily basis. Each offers a unique functionality for entering and exiting the live market. Ultimately, a trading strategy's demand for speed or precision determines whether a market, limit or stop order is best-suited for the task at hand.
1. Market Orders
Upon being sent to the forex market, a market order is immediately filled at the best available price. Market orders are ideal for traders who do not require a high degree of precision in forex entry and exit, but who need enhanced execution speed. Market orders are sent and filled in real-time, so the cost of slippage can be significant during volatile periods.
Market orders are practical when used in conjunction with momentum and trend following strategies. Conversely, the increased cost of slippage associated with this type of order undermines the effectiveness of scalping and range-trading methodologies. However, for traders who value time over precision, market orders are ideal.
2. Limit Orders
Limit orders are filled on the forex market at a designated price or better. Limit orders are sent to the market ahead of time, where they rest until price reaches a predefined threshold. If an exact entry or exit point is required to preserve a strategy's efficacy, then this type of order is appropriate.
Typically, limit orders function as a means of opening new positions in the market or as profit targets. For market entry, buy limits are placed below evolving price action (bullish, long position) and sell limits are located above price action (bearish, short position). As profit targets, buy limits are placed below price action to exit a bearish position and sell limits are placed above price action to exit a bullish position.
3. Stop Loss Orders
Stop loss orders, or simply "stops," are devices used to exit negative positions. Stop losses rest at the market until triggered and limit the downside liability of any active trade. Stops are invaluable tools for risk management as they protect the trader from suffering catastrophic loss.
The placement of stop loss orders varies according to the strategy being implemented. However, buy stops are placed above price for short positions and sell stops are placed beneath price for long positions. To ensure that they rest in the market queue until triggered, stop loss orders require the added functionality of market and limit orders. Thus, stops come in two basic varieties:
- Stop Market: A stop market order combines the functionality of market orders and stops. When the stop market order is hit, it is instantly filled at the best available price. When exiting the market quickly is of the utmost concern, the stop market order is a solid strategic option.
- Stop Limit: The stop limit order integrates the specificity of limit orders with the placement of stops. A stop limit order is designed to be filled at or within a certain number of pips from the stop's designated price. These orders are ideal for strategies that require a high degree of precision.
In addition to functioning as conventional stop losses, both stop market and stop limit orders may be used for market entry. This is a common practice in breakout trading, where entry points are aligned with the flow of price at a specific level. When used for opening new forex positions, buy stop market and buy stop limit orders are located above price for a bullish entry. Sell stop market and sell stop limit orders are located below price to secure a bearish entry.
Hybrid Order Types
Hybrid orders are more advanced than conventional orders, in that they include strategic parameters. Among the most common hybrids are trailing stops and multi-bracket orders. Given their advanced functionalities, these devices are popular for automated and algorithmic trading strategies.
1. Trailing Stops
A trailing stop loss order is one that moves in concert with evolving price action. It is an automated trade management strategy, designed to limit risk while optimising reward. A trailing stop loss may be defined according to a wide variety of parameters, commonly as a set number of pips or as a percentage of the trading account balance.
The location of a trailing stop moves in concert with price action. Typically, as a trade goes positive in relation to its entry price, the trailing stop loss also moves positively on a pip-by-pip basis. To illustrate, assume the following scenario:
- Trader A buys the EUR/USD from 1.2001.
- A static trailing stop of 25 pips is implemented.
- Upon market entry, the trailing stop loss is initially located at 1.1976.
- For every pip the EUR/USD moves above 1.2001, the trailing stop also moves up by one pip.
Trailing stops are great for trend following, breakout, or momentum strategies. Their dynamic nature enables the trader to pursue extraordinary returns while adjusting risk exposure in real-time.
2. Multi-Bracket Orders
A multi-bracket order fully automates market entry and exit via the use of market, limit and stop loss order types. Essentially, a multi-bracket is an order-cancels-order (OCO) that simultaneously manages several stop losses and profit targets. Multi-brackets are ideal for advanced trade management strategies that involve position sizes of more than one standard, mini or micro lot.
From a practical standpoint, multi-brackets have countless strategic applications. A few of the most common are for scalping and breakout methodologies involving more than one profit target. Also, multi-brackets may incorporate trailing stops to build a truly dynamic approach to intraday, day or swing trading. This type of order is customisable and may be designed to achieve nearly any trade management objective.
Conventional order types such as markets, limits and stops are traditional, user-friendly ways of entering and exiting the forex marketplace. More advanced order types, such as trailing stops and multi-brackets, furnish active traders with scores of strategic alternatives. Ultimately, selecting a well-suited forex order type depends upon one's objectives, resources and style of trading.
Please note that all illustrations are only shown for the purpose of a technical demonstration and should not in any way be construed as recommending any type of trading strategy and they do not constitute any form of investment advice.
FXCM Research Team
FXCM Research Team consists of a number of FXCM's Market and Product Specialists.
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