Types of orders in forex. Their features and when to use them

How to choose the right order in Forex

14-01-2021

We have already covered the types of orders earlier (read about it here). Now it’s time to discuss how to pick them the right way. MetaTrader 4 and MetaTrader 5 trading platforms offer a wide selection of ways to open trades. Choosing the right forex order is not that complicated as long as you understand the features of each one. Today, we are going to investigate what situations to use a specific order in.

Contents:

1. Right Forex Order Is One that Is in Line with the Current Situation
2. Market Orders in Forex: When to Use Them
3. How to Use Pending Orders
4. Pending Orders for MetaTrader
5. Stop Order is What Protects the Trade

Right Forex Order Is One that Is in Line with the Current Situation

In order to make the most out of the features offered by trading platforms, make money in the market, and not just lose it, it’s important to understand what orders should be used in each particular scenario. First things first, let’s recall what types of order exist:

  • Market orders: orders to sell or buy an asset at the current price.
  • Pending orders: orders to open a trade when certain market conditions emerge.
  • Stop orders: this type of orders is used to take profit or loss in the open position.

What is forex order and what orders are there

Market Orders in Forex: When to Use Them

The name of these orders speaks for itself—the trade is made at the currently available market price. When choosing Market Execution in MetaTrader 4(5) trading terminal, you will see two buttons only: Buy (Buy by market) and Sell (Sell by market). The long position is opened at the ask price and a short one at the bid price.

Here’s when you should use market orders:

1. If your trading strategy stipulates that a trade should be opened by market.

2. With scalping strategies.

3. Typically with indicator strategies (when the moving averages cross, in cases where oscillator exits the overbrought or oversold areas, etc.).

When trading news, the use of the market order in most cases is not exactly the smartest decision.

First of all, there is no way to know where the price is going to go next and, second of all, when there is a spike in volatility, the prices change quickly and dramatically, so the trade may be opened at a very unfavorable price.

How to Use Pending Orders

Let it be recalled that pending order is an order to open a position later when a suitable entry point emerges in the market. These types of orders in the stock exchange allow you not to miss a profitable market signal and open trades even if you aren’t on your computer. There are two fundamental differences between pending orders:

1. Limit order is used when you expect a bounce off major levels.

2. Stop order is placed in anticipation of the breakout.

Now let’s take a look at each one individually:

Buy Limit is placed when we expect the price to bounce upwards. E.g. the price approaches the support level. It is yet unknown whether it will break out the level or bounce off it upwards. It too early to buy and obviously way too early to sell. You can wait for it but it’s likely that you will miss the entry point.

If your trading strategy implies the opening of long positions when the price bounces off the support level, you should place the Buy Limit above that level. Should your forecast turn out to be accurate and the price actually bounce, the long position will be opened automatically.

Sell Limit is an order to sell the asset when the price bounces off the level downwards. For instance, the price approaches the resistance level. If it bounces off it downwards, you can go short. In order not to wait until the entry point appears, you can place the Sell Limit order.

Buy Stop is an order which implies the opening of a long position as soon as the price breaks out a certain level. For example, if the price breaks out a major level from the bottom upwards, you can go long after it consolidates above it. Before this point gets formed, you can place the Buy Stop at a price which is slightly higher than the given level.

Sell Stop works in a similar manner, except in the mirror image. We place it when we need to sell after a certain level has been broken out from top downwards.

Buy Stop and Sell Stop are often used when trading news. They are placed above and below the current price value 15 minutes prior to the release of the key macroeconomic indicators. When one of the orders opens, another one gets removed.

The right forex order: USD/CAD pair

The right forex order: XAU/USD pair

Pending Orders for MetaTrader

MetaTrader trading terminal has two more pending orders:

  • Buy Stop Limit is an order given to the broker to place Buy Limit when the price breaks out a specific level.
  • Sell Stop Limit implies the placement of a pending Sell Limit when the price breaks out a certain level from the top downward.

It makes sense to use them when you wish to open a trade with a pending order once the accuracy of the level breakout is confirmed.





Stop Order is What Protects the Trade

You can close the trade manually but it’s still better to place take profit and stop loss. Stop loss is used to limit the risks per trade. In essence, you request the broker beforehand to stop losses per your position when the price reaches a specified value. Take profit is placed at a level where you are planning to lock in profits.

PLEASE NOTE:

Rules for placing stop loss and take profit should be tailored to each trading strategy and outlined in its terms.

There are also floating stop loss and trailing stop. It is normally used when trading news or with other strategies that imply short-term trading. What it does is follow the price while it is moving in your direction.

As soon as reversal happens, trailing stop turns into a regular stop loss. With that said, it has one shortcoming which you should factor in: trailing stop works only in the active trading terminal.


Watch this video to learn more about rules for placing trailing stop or stop loss.



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