Forex Order Types Demystified: Understanding Stops, Limits and More

Foreign exchange trading, known as forex or FX, involves buying and selling different currencies in pairs. When initiating forex trades, traders use order types to control when and how their trades are executed. Understanding the various forex order types is crucial for developing effective trading strategies. In this comprehensive guide, we’ll demystify the major forex order types so you can utilize them skillfully in your trading.

Introduction to Forex Order Types

Forex orders are instructions from traders to their brokers for entering or exiting trades. The most common order types are:

• Market orders – Execute immediately at the best available market price
• Limit orders – Execute at a specified price or better if that price level is reached
• Stop orders – Become market orders when a specified price level is reached
• Stop limit orders – Become limit orders when the stop price is reached

Additional advanced order types include:

• Trailing stops – Stop orders that trail price movement to lock in profits
• Entry orders – Combine stop and limit orders to enter new positions
• One cancels the other orders – Place a pair of orders where one cancels if the other is filled
• Contingent orders – Orders that are triggered by another order being filled

Understanding these forex order types allows traders to precisely control trade entry and exit based on their trading plan and risk management. With the right orders, traders can automate their strategies, manage risk, and react quickly to changing market conditions.

Now let’s explore the key forex order types in greater detail.

Market Orders

Market orders are the simplest forex order type. They instruct your broker to immediately buy or sell at the best available market price.

For example, if you place a market order to buy EUR/USD, it will be executed at the current ask price. If you place a market order to sell EUR/USD, it will execute at the current bid price.

The main advantage of market orders is they fill quickly and guarantee execution. This makes them best for getting into or out of trades immediately.

However, the downside is that exact entry or exit prices are not controlled. In fast-moving volatile markets, filling at disadvantageous prices can happen. Market orders are recommended when:

• You need to enter or exit a trade right away
• The market has low volatility and tight spreads
• You prioritize guaranteed execution over price

Overall, market orders provide the speed and certainty of execution needed for time-sensitive trading situations.

Limit Orders

Limit orders allow traders to buy or sell only at a specified price or better. This gives precise control over trade entry and exit.

For a buy limit order, only execute the buy if the ask price reaches or goes below the limit price specified. For a sell limit, execute the sell if the bid reaches or exceeds the limit price.

The main advantage of limit orders is they prevent unfavorable fills during volatile market moves or gaps. By waiting for your desired price, you can plan the perfect entry or exit.

However, the downside is that limit orders may never be filled if the market moves away from your specified price. Use limit orders when:

• You want control over the entry or exit price
• You believe the market will retrace to a certain level
• You cannot monitor the market continuously

With limit orders, you “set and forget” your orders then wait for the price to reach your limit. They help stick to your trading plan for planned entries and profit targets.

Stop Orders

Stop orders become market orders to buy or sell when a specified stop price is reached. They help cut losses or lock in profits with market orders if price reaches an undesirable level.

For long trades, place stop sell orders below the market price to limit downside risk. If the price falls to the stop price, it triggers a market sell order.

For short trades, place stop buy orders above the market price. If the price rises to the stop level, it triggers a market buy order to close the short position.

The main advantage of stop orders is they provide insurance against excessive losses. By automating your risk management strategy, stops can save an account from disaster.

However, in fast-moving markets, slippage past the intended stop price can happen. Also, stops cannot be guaranteed because markets can gap. Use stop orders when:

• You want to limit downside risk on a position
• You want protection against volatile market moves
• You cannot monitor the market continuously

With stop orders, you can set them and forget them, allowing the market action to trigger your orders. They are essential for managing risk on open forex trades.

Stop Limit Orders

Stop limit orders combine the features of stop orders and limit orders. Once the stop price is reached, it triggers a limit order instead of a market order.

This helps avoid slippage from market orders while still providing a “stop” function to contain losses or take profits if a price level is reached.

For long positions, place stop limit sells below the market price. When the stop price hits, it sends a sell limit order to execute at or above the limit price. This exits the long position without filling at a significantly worse price due to a fast-moving market.

For short positions, place stop limit buy orders above the market price. If the buy stop price is reached, it triggers a buy limit order to close the short trade at the desired limit or better.

The main advantage of stop limits is they allow some control over the exit price while still providing a stop loss function. The disadvantage is that in fast markets, the limit order may not fill before prices move further away from your acceptable range.

Use stop limit orders when:

• You want to exit positions with limit orders but still have stop loss protection.
• You expect the market may gap or move very quickly when a stop price is hit.
• You want more exit price control than a regular stop order.

Overall, stop limit orders can help manage risk while still exercising some price control when markets are moving very quickly. They provide a balance between regular stops and limits.

Trailing Stops

A trailing stop is a dynamic stop order that automatically trails price movement to lock in profits. As the market moves in your favor, the stop price adjusts to follow along at a specific distance behind the current market price.

If the market reverses, the stop order triggers a market order to close your position when the stop price is hit. This exits a profitable trade and solidifies gains without giving back too much.

For long positions, trailing stops follow the price upwards as it rises. If the market falls towards the trailing stop level, the long order is closed by a stop market sell order.

For short positions, the trailing stop follows the price downwards as it falls. If the market rises towards the trailing stop level, the short is closed by a stop market buy order.

The main advantage of trailing stops is they allow profits to run while automatically tracking the market to protect gains. The disadvantage is they can be stopped out too early before a bigger move in your favor develops.

Use trailing stops when:

• You want to lock in and protect open profits in a trade
• You expect the trend to continue moving favorably
• You want automated exit orders as the trend unfolds

Overall, trailing stops provide a hands-free way to maximize and protect profits as winning trades develop. They follow the market trend automatically to lock in gains at a safe distance behind price.

Entry Orders

Entry orders combine a stop order with a limit order to control the entry price when establishing new trades. They help time the most advantageous entries according to the market structure.

The two most common types of entry orders are:

Stop Entry Orders – Place a stop order at a chosen price, then when triggered, send a limit order to enter the trade. This enters breakouts while controlling the entry price.

Limit Entry Orders – Place a limit order at one price, then add a stop order further from market. When the stop triggers, execute the limit. This enters setups at support/resistance while controlling risk.

The main advantage of entry orders is they automate planned entries when certain price levels are reached. This provides hands-free trade execution according to your strategy.

The main disadvantage is the market may reverse after hitting one level but before hitting the second level. This would result in a missed entry opportunity.

Use entry orders when:

• You want to plan both entry price and risk level ahead of time
• You cannot monitor the charts continuously for your desired entry
• You want automated entry signals from the market

Overall, entry orders allow traders to pre-define optimum entry price and risk points according to the market structure. They automate trade entries based on your trading edge.

One Cancels the Other Orders

One cancels the other (OCO) orders involve placing two linked entry or exit orders for the same currency pair. When one of the orders is executed, the other order is automatically canceled.

For example, you could place a stop loss 20 pips below current price paired with a profit target 40 pips above current price as an OCO exit order. When either the stop or target is hit, the other exit cancels automatically.

For entry, an OCO could combine a buy limit 10 pips below current price and a buy stop 15 pips above current price. If either entry order fills, the other cancels immediately.

The advantage of OCO orders is they automate the execution of a trading strategy both ways by bracketing the market. The disadvantage is only one side of the OCO will trigger.

Use OCO orders when:

• You want to capture a potential upside or downside market breakout
• You want to avoid executing both sides of an order bracket
• You expect price may breakout up or down within a range

Overall, OCO orders provide an efficient way to place multiple linked entry or exit orders around current market price. They allow reacting fast to price breakouts in either direction.

Contingent Orders

Contingent orders are triggered by another order being executed. They help traders stage orders for advanced strategies involving multiple connected orders.

For example, placing a profit target limit order that is contingent on entry stop order being triggered first. This exits a trade at a planned price if the entry order fills initially.

Another example is a stop loss contingent on a limit entry order filling from an earlier stage. The stop loss attaches automatically after the entry order is successful.

The advantage of contingent orders is they allow complex multi-order strategies to be automated according to market price action. The disadvantage is they rely on the first trigger order filling before subsequent orders.

Use contingent orders when:

• You want to create multi-step order strategies involving linked orders.
• You need your orders to automatically sequence following price action.
• You want to minimize re-adjusting orders manually.

Overall, contingent orders enable traders to pre-plan dynamic multi-order strategies. By chaining orders together based on market moves, complex order execution can be automated.

Conclusion

Here are some key takeaways:

• Market orders execute immediately at the current market price, providing speed and certainty.
• Limit orders allow price control and waiting for optimal price, but may not fill.
• Stop orders become market orders when a stop level is hit, managing risk.
• Stop limit orders reduce slippage but may not fill in fast markets.
• Trailing stops lock in profits as trades move favorably.
• Entry orders combine stops and limits to enter new trades.
• OCO orders place two linked orders with one canceling the other’s fill.
• Contingent orders chain multiple orders by sequence of market action.

Understanding these forex order types provides powerful tools for planning and executing trading strategies. Use the right orders for your strategy and apply them where most appropriate based on the market conditions. With order types mastered, you can precisely control your forex trades like a professional.

Frequently Asked Questions About Forex Order Types

What are the main types of forex orders?

The most common forex order types are market orders, limit orders, stop orders, stop limit orders, trailing stops, entry orders, one cancels other orders, and contingent orders. Each order has advantages based on the trading situation and strategy.

Which forex order guarantees execution?

Market orders guarantee execution and fill immediately at the current market price. All other forex order types either involve a trigger price for activation or may not fill if the market moves away from the specified price. Only market orders assure getting into or out of a forex trade right away.

Which order allows you to buy or sell at a set price?

Limit orders allow buying or selling at a pre-defined entry or exit price. Limit orders only execute at the exact limit price specified or better. This provides precise control over trade entries and exits at desired prices, but does not guarantee execution if the limit price is not reached.

How do I automate closing trades at a certain price?

Placing stop loss orders allows automating trade exits if a predefined stop price is hit. Stop market orders become market orders when the stop price level is reached. This automatically closes the trade at the current market price if price hits your defined stop loss level.

What order type locks in profits as price moves favorably?

Trailing stops are designed to lock in profits as trades move advantageously. Trailing stops automatically follow behind the current market price by a set distance as trades become profitable. If price reverses by the trailing stop amount, it triggers an exit order to close the profitable trade automatically.

How can I buy when price breaks resistance or sell when it breaks support?

Entry orders, like stop entry buy or sell limit entry orders, allow entering new trades when price breaks defined levels. Entry buy stop orders trigger limit buy orders when resistance breaks, going long at desired price above the breached level. Sell stop entry orders trigger short sells via limit orders when support breaks.

What is best for avoiding slippage – stops or stop limits?

Stop limit orders can reduce slippage compared to regular stop market orders. Stop limits place limit orders rather than market orders when the stop price triggers. The limit order allows setting a minimum acceptable price for exiting the trade after the initial stop level is reached. This reduces the chance of the market running away before filling.

Should I place OCO orders or separate orders?

OCO (one cancels the other) orders provide an efficient way to place two linked entry or exit orders. The order cancels once one side is filled. Separate orders may result in being filled on both sides unintentionally. OCO orders avoid this by mutually excluding the two orders – only one can be executed.

How do I automate a multi-step trading strategy?

Contingent orders allow traders to pre-program multi-step trading strategies by chaining orders together. Each contingent order automatically triggers based on the prior contingent order being filled or triggered by the market. This creates an automated sequence based on price action to execute elaborate strategies.

Pros and Cons of Different Forex Order Types

Market Orders

Pros

• Guaranteed, immediate execution at current market price
• Ideal for getting into or out of trades quickly
• No waiting for a certain price level to be hit

Cons

• No control over entry or exit price received
• Increased risk of slippage from order fills during high volatility
• Aggressive – prices can move significantly from order placement to execution

Limit Orders

Pros

• Precise control over entry and exit prices
• Avoid poor fills if price gaps or slips through stops
• Plan orders strategically based on market structure

Cons

• No certainty of execution if price misses limit level
• May enter or exit trades slower than ideal conditions
• Requires more monitoring to change limits if not filled

Stop Orders

Pros

• Automatically manage risk with stop losses
• Exit trades swiftly if price moves against position
• Protect against volatile whipsaws and slippage

Cons

• Stop prices are not guaranteed – gaps can miss stops
• Potential for slippage on order fills in fast markets
• Stops taken out may precede a move back in your favor

Trailing Stops

Pros

• Locks in profits and maximizes trade winners
• Moves stops automatically as price trends
• Hands free trade management once activated

Cons

• Can be stopped out too soon before further gains
• Not guaranteed to fill, especially in volatile conditions
• Requires constant monitoring and adjustment

Entry Orders

Pros

• Combines price and risk control at trade entry
• Automates planned entries with stops and limits
• Hands free order placement for high-probability setups

Cons

• Market can reverse after first trigger but before entry
• Complex with multiple orders to monitor and adjust
• Entry triggers don’t guarantee further profitable trend

Examples of Order Types in Action

Let’s look at examples that demonstrate key forex order types in action for both trade entry and trade exit situations.

Stop Sell Entry Order

John wants to sell the GBP/JPY pair if it breaks below a key support level at 148.50, which would signal a shift to a bearish trend. He places the following stop sell entry order:

• Sell stop order at 148.49 – Triggered if GBP/JPY trades at or below this price
• Sell limit order at 148.35 – The limit order sent once sell stop triggered

This combines his price entry and risk management by entering short on a support breakout but at a better price below the breached level.

The market drops from 149.50 down to 148.45, triggering John’s stop sell order. This activates the attached limit order and he sells GBP/JPY short at 148.35 for risk control and a better short entry price.

OCO Take Profit and Stop Loss Exit Orders

Jane buys EUR/CAD at 1.5345 with a bullish outlook but wants to limit risk if wrong. She places the following OCO exit orders:

• Take profit limit order at 1.5455 to lock in +100 pips if outlook is correct
• Stop loss market order at 1.5295 to close at -50 pips if price drops

This OCO order brackets the market, allowing Jane to book profits if EUR/CAD rises or cut losses fast if EUR/CAD declines. Once either order fills, the other is canceled automatically.

Price rallies from 1.5345 up to 1.5465, triggering Jane’s take profit limit order. Her position