Forex Order Types Demystified: Using Stops, Limits and More Like a Pro

Trading forex can seem complicated for beginners. Between pips, lots, leverage and more, there’s a whole new vocabulary to learn. One of the most crucial components of forex trading involves understanding order types. The various types of orders allow traders to control risk, lock in profits, and customize their trading strategies.

In this comprehensive guide, we’ll demystify forex order types so you can trade like a pro. You’ll learn about different order types including market, limit, stop, and take profit orders. We’ll also cover more advanced tactics like OCO (one cancels the other) orders. With the right order types in your toolkit, you can execute precise, effective trades on the forex market.

Introduction to Forex Order Types

Orders are instructions from traders to brokers indicating how to enter or exit a trade. When you’re ready to place a trade based on your analysis, you need to submit an appropriate order type based on your objectives.

The forex market allows for advanced order types beyond simply buying or selling at the current market price. More sophisticated orders give traders greater control over their risk management strategies. However, beginners should start with basic market orders before graduating to more complex order types.

Mastering order types is an essential milestone in forex trading. Fortunately, they’re not difficult to understand once you learn the differences. The major forex order types include:

• Market order – Execute trade immediately at current market price
• Limit order – Trigger trade when price reaches specified level
• Stop order – Trigger trade when price reaches specified level
• Take profit order – Close trade when price reaches target profit level
• Trailing stop order – Close trade when price reverses by specified amount from peak

In addition, one cancels the other (OCO) orders combine two orders for efficient execution of a trading strategy. We’ll explore each type of order in-depth in this guide. First, let’s go over some key benefits of using different order types.

Benefits of Using Diverse Forex Order Types

Here are some of the main advantages of harnessing the full range of forex order types:

• Manage risk – Stop losses and take profit orders let you limit potential losses and lock in gains.
• Enter on pullbacks – Limit orders allow you to identify key support and resistance levels to enter on retracements.
• Trade breakouts – Stop orders let you jump into emerging trends as key levels break.
• Automate trading – OCO orders give you a hands-free approach for two pre-defined scenarios.
• Customize strategies – The flexible order types can match any trading style or system.
• Control execution – Precise entries and exits help you maximize profits.
• Trade 24/7 – Orders can execute even when you’re not actively trading.

Now let’s explore how to use the various forex order types to your advantage. We’ll start with the most common order for beginning forex traders – the market order.

Market Orders

Market orders are the simplest forex order type. With a market order, you instruct your broker to execute a trade immediately at the best available current market price. It’s a straightforward “buy now” or “sell now” order.

Here are some key points about market orders:

• Execution is immediate – Trades are filled as soon as the order reaches your broker’s servers. This means no waiting for a certain price level.
• You accept the current market price rather than specifying your ideal price target. The order is subject to slippage if the market is volatile.
• Market orders prioritize execution over price precision. You want the trade filled right away.
• Buying is called “going long.” Selling is “going short.” The order can close an open position too.
• Good for trading news events or breakouts when you want to be in the market right away.

Let’s say EUR/USD is trading at 1.2500/1.2503. If you submit a market order to buy, it will execute close to 1.2503. If you sell, it will execute around 1.2500. You take the next available price.

One downside is that sudden volatility can lead to poor entry prices. But market orders provide guaranteed execution, so they’re popular for breaking into new positions.

Limit Orders

A limit order differs from a market order in that it specifies a certain ideal price level rather than accepting the current market price.

With a limit order:

• You set a target price threshold for execution rather than simply taking the market price.
• The limit order won’t be filled until the market price reaches your specified level.
• Can be used to enter and exit trades at predetermined levels.
• Help set entry points ahead of major news events or data releases.

For example, if EUR/USD is trading at 1.2500/1.2503, you can set a limit order to buy at 1.2450. This order will remain pending until the market drops and trades at your target.

Conversely, if you set a limit order to sell at 1.2550, the order won’t activate until the currency pair trades up to that price threshold.

Limit orders allow you to identify key levels and wait patiently for prices to reach them before triggering your trade. They help you buy low and sell high consistently.

A limit order to buy is placed below the current market price and waits for the pullback. A sell limit order sits above, waiting for an uptrend.

Limit orders are commonly used for trading retracements by identifying areas of support and resistance. For options traders, limit orders help get ideal entry prices on weekly expiration dates. Overall, limit orders provide price control at the expense of immediate execution.

Stop Orders

Stop orders serve essentially the opposite purpose of limit orders. Rather than providing price control, they prioritize trade execution when the market moves against you by a predefined amount.

Here are some key points on stop orders in forex:

• Triggered when a certain price level is reached, determined by the trader
• Used to limit losses on existing open positions
• Also useful for entering new trades after significant market movements
• Stop loss orders cut losses on losing trades
• Stop entry orders allow trading breakouts

For example, let’s say you are long EUR/USD at 1.2500. You can set a stop loss order at 1.2450 – if the market trades down to this level, it will activate a market order to close your position and cut your losses.

On the flip side, you can place a stop entry order to buy at 1.2550 in order to trade the breakout above resistance. The order won’t trigger until this level is exceeded.

Stop orders are critical for risk management in volatile currency markets. They provide insurance against adverse price swings and let you exit trades at predetermined levels. Without stop losses, a single large loss can wipe out many previous gains.

Take Profit Orders

Similar to stop losses, take profit orders allow you to specify price levels where you want to close out winning trades and lock in gains.

Some key characteristics of take profit orders:

• Triggered when the market price reaches your predefined target level
• Used to systematically book profits on successful trades
• Complement stop losses for managing trades from start to finish
• Useful for closing out all or partial positions to realize incremental gains

For example, if you buy EUR/USD at 1.2500, you could set a take profit order at 1.2600. If the market rallies to this level, the order closes the trade automatically.

Take profit orders are an indispensable tool for forex traders. Even if you personally monitor all your trades, having pre-defined profit targets helps remove emotion-based decision making when trades move in your favor. They encourage proactive profit taking.

Between stop losses and take profit orders, you can manage every trade from start to finish with precision – a key edge for trading forex successfully long-term.

Trailing Stop Orders

Trailing stop orders provide a flexible approach to trade management. Rather than setting a specific price target, a trailing stop order follows the market price at a defined increment.

Key characteristics of trailing stops:

• Don’t have a fixed trigger price – move incrementally based on market changes
• Automatically follow the market and lock in gains as price moves favorably
• If market reverses, the stop order triggers trade closure to preserve accumulated profits
• Customizable based on volatility, time frame, risk tolerance

For example, you buy EUR/USD at 1.2500 with a 50 pip trailing stop. As the market moves up, the trailing stop will rise by 50 pips also. If EUR/USD rises to 1.2600, your trailing stop will be at 1.2550. If the price then drops, your stop order will execute closure at 1.2550 to protect profits.

Trailing stops provide flexibility since you don’t have to predict specific price levels. They automatically follow the trend and help protect against reversals. The increment can be adjusted as needed.

Overall, trailing stop orders are ideal for riding big winning trends effectively. They provide dynamic adjustment to changing market conditions.

OCO (One Cancels the Other) Orders

OCO orders combine two contingent orders – if one order activates, the other is automatically cancelled. This dynamic order type lets you set up two scenarios with automatic execution.

For example, you could combine:

• Stop entry order to buy above 1.2600 with…
• Stop loss order to sell below 1.2500

As soon as either order triggers based on price movements, the other order is cancelled.

This creates a hands-free approach where you implement predefined actions for two possible market outcomes. If it breaks higher, you enter long. If it breaks lower, you cut losses.

OCO orders provide an efficient, low-maintenance way to trade breakouts in either direction. You don’t have to micromanage multiple orders. Just set the parameters and let the market run its course.

An OCO order executes one of two trades depending on price movements.

OCO orders demonstrate how combining conditional orders can create dynamic trading strategies. You can craft specific actions to match different market scenarios using the various order types.

This provides high-level automation for your trading plan. The orders activate independently based on price action – no manual intervention required. OCO orders are like pre-programmed trading bots customizable to your risk approach.

Choosing the Right Forex Order Types

Here are some guidelines for selecting appropriate order types based on your trading objectives:

• Market order – Great for getting into breakouts quickly when prices aremoving fast. Accept some slippage to ensure execution.
• Limit order – Useful for buying dips or selling rallies. Identify key support and resistance levels for execution.
• Stop loss – Mandatory for risk management. Determine maximum loss you can accept, then set stops slightly beyond.
• Take profit – Have targets in mind for your trading setups. Use take profits to lock in gains at those levels.
• Trailing stop – Excellent for riding trends. Let trailing stops follow the market to protect against reversals.
• OCO orders – Automate your actions for a breakout move in either direction. Great for hands-free management.

In general, have at least a stop loss and take profit on every trade. Limit orders provide more discretion for entries. Trailing stops help maximize your profits on big runs. OCO orders facilitate breakout strategies.

Match the order types to your personal trading plan based on your analysis. With the right implementation, order types can optimize every aspect of your forex trading.

Common Forex Order Scenarios

Let’s discuss some common scenarios where different order types can be highly effective:

Trading the Breakout

When prices are consolidating in a tight range, a breakout trader can set up an OCO order:

• Stop entry buy order placed just above the high of the range
• Stop loss sell order placed just below the low of the range

This allows immediate entry if the range resolves higher, while limiting losses if it breaks down. No need to monitor constantly – the OCO order executes the strategy automatically based on the breakout direction.

Fading the Spike

When the market spikes sharply higher or lower, fading the extremes can be profitable. OCO orders allow safe entries with predefined stop losses:

• Limit order to sell placed near the top of the spike
• Stop loss order to cover losses if selling fails

Executing this strategy manually requires careful attention. OCO orders implement the fade autonomously – you simply set the limit sell level near the peak and stop loss slightly beyond.

Buying the Dip

Limit orders excel for buying dips in an uptrend. After a surge higher, buyers will often defend support levels:

• Identify key support levels in an uptrend
• Place limit orders to buy just above those supports
• Stops can trail price for flexible exits

This takes the emotion out of trying to manually pick bottoms. Limit orders target pre-defined support levels where buyers are likely to return.

The various order types accommodate any trading style. Match your strategy with the appropriate orders for efficient execution. With practice, combining orders will become second nature.

Key Takeaways on Forex Order Types

Here are some key points we’ve covered about the major forex order types and how to use them effectively:

• Market orders provide guaranteed execution immediately at the current market price. Great urgency but subject to slippage.
• Limit orders allow you to set specific price levels where you want to execute trades. Control entry points.
• Stop losses cut losses at predefined levels. Critical for risk management on all open positions.
• Take profits lock in gains at specified target levels. Useful for closing out profitable trades.
• Trailing stops follow the market incrementally to protect against reversals. Great for riding trends.
• OCO orders combine two contingent orders for automated execution. Efficient for trading breakouts.
• Match order types to your trading plan. Use different orders for precision entries, risk management and exits.
• Practice combining orders such as OCOs and limits with stops to refine strategy automation.

The various forex order types provide traders with tremendous flexibility. Take the time to understand how each one functions. Start with basic market and limit orders, then add stops, trailing stops and OCO orders once you have mastered the basics.

With the right order types tailored to your trading system, you will trade like a pro and achieve greater success on the forex market.

Frequently Asked Questions

1. What’s the main difference between a limit order and a stop order?

The key difference is a limit order activates when the market price reaches your specified level, while a stop order triggers when the market moves against you to a predefined level. Limit orders provide price control, while stops help manage losses and entries after big market movements.

2. When is it better to use a market order instead of a limit order?

If getting into a trade immediately is your top priority, use a market order. You’ll accept the current market price instead of trying to achieve a more precise entry with a limit order. Market orders are best for quickly acting on breaking news events or trading short-term charts.

3. Where should I set my stop loss and take profit when entering a trade?

A general guideline is to set your stop loss below the nearest support level for a long trade, or above the nearest resistance level for a short trade. Take profits can be targeted near resistances in uptrends, or near supports in downtrends. Move stops to break even once the market moves favorably.

4. How frequently should I move my trailing stop?

The best approach is to manually move trailing stops to break even once the market moves in your favor, rather than automatically tightening. Avoid adjusting your trailing stop increment – choose a comfortable range and leave it. Moving stops too often results in getting stopped out of winning trades prematurely.

5. Can I use OCO orders to open a new trade instead of closing an existing one?

Absolutely. OCO orders are extremely flexible. For example, you can set a buy stop order above resistance combined with a sell stop order below support to trade a breakout in either direction. The same principles apply for entering new trades or closing existing positions.

6. Is it possible to use OCO orders on short time frame charts like the 5 minute or 1 minute?

Yes, OCO orders can be applied successfully to short term trading. The faster the charts, the tighter your stops should be to account for increased volatility. For very short durations under one hour, use no more than 5-10 pip stops. Limit orders can pinpoint fast entries, while OCOs automate your reactions to sharp price swings.

Conclusion

The various order types provide forex traders with extensive control over their trade execution. While market and limit orders form the foundation, mastering stop losses, take profits, trailing stops and OCO orders will take your trading to the next level.

Match the order types to your personal trading plan. Use stops and limits for risk management and target entries. Trailing stops protect against reversals. OCO orders automate your strategy reactions.

With practice, you’ll learn which types of orders fit best with your own analysis process and trading style. Customizing your orders will enable you to trade the forex market like an expert.

Remember to start small and add more advanced orders slowly. Refine your usage of different orders in a demo account first before applying them to live trades. With the proper precautions, order types offer many advantages for your trading.