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

Forex trading offers traders access to a massive, liquid market with opportunities for profits. But navigating the complex world of forex orders can be intimidating for beginners. This comprehensive guide will shed light on the various forex order types, how they work, and when to use them so you can trade like a pro.

Introduction

When initiating trades on the forex market, you need to specify the type of order to place. Forex order types determine how and when your trade will be executed. Using the right order at the right time can maximize profits and minimize losses.

This guide will explore the most common forex order types available, including:

• Market orders
• Limit orders
• Stop orders
• Stop limit orders
• Trailing stops
• Entry orders
• Contingent orders
• OCO (One Cancels Other) orders
• IFD (If Done) orders

We’ll cover the definition and mechanics of each order type, their pros and cons, and optimal use cases. You’ll learn strategies to use stops and limits to manage trades. This will help you gain the confidence to utilize the full range of forex orders like an expert.

Understanding order types is crucial to developing an effective trading plan. Let’s dive in and expose all the ins and outs so you can start trading forex successfully.

What Are Forex Orders?

A forex order is an instruction from a trader to their broker to enter or exit a trade at specified price levels. Forex orders are executed when certain criteria are met in the market.

Orders must indicate:

• Whether it is a buy or sell order
• The currency pair
• Size of the trade
• Type of order

The order type determines how and when the trade will be executed. There are many order types to suit various trading strategies and risk management preferences.

Brokers offer trading platforms where traders can select order types and place orders with a few clicks. The order is then sent to liquidity providers in the interbank market for execution according to the order criteria.

Understanding available order types and using them effectively is key to succeeding in forex trading.

Market Orders

A market order is the most basic forex order type. It instructs the broker to execute a trade immediately at the current market price.

How Market Orders Work

When you place a market order, it is executed as soon as the broker receives it at the best available price in the market. There is no price specified with market orders – you simply buy or sell at the prevailing market price when the order is executed.

Market orders get filled quickly and are used when you want to enter or exit a trade right away. This makes them ideal in volatile markets when prices are rapidly changing.

However, the downside is that you don’t control the entry or exit price. You may end up with an unexpected or unfavorable fill price, especially if the market is moving sharply in one direction. Large market orders can also influence the market by shifting prices.

Pros of Market Orders

• Immediate entry and exit
• Ideal for volatile, fast-moving markets
• Good for breakout traders

Cons of Market Orders

• No control over entry/exit price
• Increased risk of slippage
• Can influence market prices

Market orders are best used for traders who need to get in or out of the market right away. They provide immediate order execution but lack price control.

Limit Orders

A limit order lets you define a specific price for trade entry or exit. It offers more control than a market order.

How Limit Orders Work

With a limit order, you specify the maximum price to pay when buying or minimum price to receive when selling.

For a buy limit order:

• The entry price must be LOWER than the current market price

For a sell limit order:

• The entry price must be HIGHER than the current market price

The order will trigger if and when the market price reaches your specified limit price. However, there is no guarantee your limit order will be filled – the market may reverse and move away from your limit before reaching it.

Limit orders provide you price control and help manage your risk. For example, you can place a buy limit below support to get the best price on a bounce. Or use a sell limit to exit a long position near resistance.

Pros of Limit Orders

• Control of entry/exit price
• Useful for trading bounces and breakouts
• Manages risk on trade exits

Cons of Limit Orders

• No guarantee of execution
• Can miss the trade if price reverses

Limit orders allow you to buy low and sell high. But use them carefully as you sacrifice speed of execution for control over price.

Stop Orders

Stop orders become market orders when a defined trigger price is reached, allowing automatic entry or exit. They help control your risk.

The two main types are buy stop orders and sell stop orders:

Buy Stop Order

A buy stop order is placed above the current market price. It triggers a market buy order when the price rises up and hits the specified stop price.

Long traders use buy stops to enter if the price breaks resistance or rallies. It’s like an automatic order – you don’t have to watch the chart at all times.

Sell Stop Order

A sell stop order is set below the current market price. It triggers a market sell order when the price drops down to your defined stop price.

Short traders use sell stops to exit positions if the price breaks support or sell off. It locks in profits and limits losses automatically.

Stop orders turn into market orders when triggered, so you may experience slippage on the fill price depending on liquidity and market conditions. However, they provide hands-free risk management.

Here are the pros and cons of using basic stop orders:

Pros of Stop Orders

• Automatic entry/exit at predetermined price
• Useful for breakout strategies
• Limits downside risk

Cons of Stop Orders

• Increased risk of slippage
• No control over fill price

Stop orders automate your trading and help control potential losses. But the lack of price control means larger stops are advisable to avoid excessive slippage on execution.

Stop Limit Orders

A stop limit order combines the features of a stop order and limit order. This gives you both automated trading and price control.

How Stop Limits Work

A stop limit activates a limit order rather than a market order when your stop price is hit. You set two trigger prices:

• Stop Price: Price at which the order triggers
• Limit Price: Maximum/minimum fill price after order triggers

When the stop price is reached, a limit order is created rather than a market order. This guarantees your entry/exit price stays within your specified limit, reducing slippage.

For example, if you set a:

• Buy Stop Limit at 1.3600 (Stop Price) with a Limit of 1.3610

The limit order to buy will activate if price hits 1.3600. But you won’t pay more than 1.3610 for the entry.

The key benefit is limiting losses by restricting the fill price. The tradeoff is executions are less certain in fast-moving markets.

Pros of Stop Limit Orders

• Controls entry/exit price precisely
• Reduces slippage compared to regular stops
• Automatic trigger provides hands-free trading

Cons of Stop Limit Orders

• May not get filled if price moves too quickly
• Less reliable execution than market/stop orders

Stop limit orders require more precision in setting trigger prices. But the ability to control your execution price makes them invaluable for risk management.

Trailing Stops

A trailing stop automatically tracks the price direction and locks in profits. This dynamic tool trails price at a defined distance as the market moves.

How Trailing Stops Work

You first open a position with a market or limit order. Then attach a trailing stop at a specified distance from market price – for example, 50 pips.

As price moves in your favor, the trailing stop moves along with it while maintaining the 50 pip distance. But if price reverses, the stop order triggers a market order close when the predefined trailing distance is reached.

Long positions use a trailing sell stop, which trails price from below. Short positions use a trailing buy stop above price.

This allows you to ride profitable trends while automatically closing out your position if the trend reverses. Trailing stops are a simple but powerful dynamic risk tool.

Pros of Trailing Stops

• Locks in profits as price trends
• Automatic exit if trend reverses
• Adjusts to market volatility
• Hands-free risk management

Cons of Trailing Stops

• Increased risk of stop hunting
• Potential for premature exit

With trailing stops, you don’t need to constantly monitor charts to exit at the right time. Just set it and forget it. However, use wider stops to avoid stop hunting by large players.

Entry Orders

Entry orders are pending orders that get triggered when price reaches a defined level. They allow scheduling trades ahead of time for automatic execution.

The main types of entry orders are:

• Buy Limit: Buys when price drops to specified limit
• Buy Stop: Buys when price climbs to specified stop
• Sell Limit: Sells when price rises to specified limit
• Sell Stop: Sells when price drops to specified stop

You simply define the trigger price where you want to enter. If and when the market price reaches your preset level, the entry order is triggered.

Entry orders are placed in advance to take advantage of potential market moves. For example, place a buy limit to trade a support breakout. Or use a sell stop to join a breakdown below resistance.

Pros of Entry Orders

• Trade breakouts automatically
• Schedule trades in advance
• Hands-free execution at desired price

Cons of Entry Orders

• No guarantee of execution
• Potential for missed opportunity

Entry orders allow you to pre-plan your trades and execute them automatically at defined prices. However, use realistic trigger levels to avoid missing the market altogether.

Contingent Orders

Contingent orders involve multiple linked orders to create advanced order strategies. They provide active traders with sophisticated tools.

The most common are:

One Cancels Other (OCO) – Place a linked OCO bracket with two pending entry orders. When one order triggers, the other is automatically canceled.

If Done (IFD) – An IFD order executes when the linked parent order is filled. The parent order can be a position entry or exit.

You can create elaborate combinations of entry and exit orders using OCO and IFD orders. Here are some examples:

• OCO bracket to buy at support or sell at resistance
• IFD take profit and stop loss linked to entry order
• Trailing stop loss IFD to exit market order

OCO and IFD orders let you preset multiple scenarios to execute orders as the market moves.

Pros of Contingent Orders

• Sophisticated order strategies
• Flexibility through order combinations
• Automates advanced trade plans

Cons of Contingent Orders

• Complex with steep learning curve
• Overreliance can lead to negligence

Contingent orders provide active traders with advanced tools to implement intricate plans. But they require experience to use effectively. Start simple.

Choosing the Right Forex Order Type

With so many order types available, how do you choose the right one for each trade?

Consider these factors when selecting forex order types:

• Trading Strategy – Match order types to your system. Use entry orders to plan breakout trades. Use limits to trade rebounds.
• Market Conditions – Volatile markets favor market and stop orders for quick execution. Ranging markets allow limit orders at key levels.
• Risk Management – Stops and limits control risk. Trailing stops lock in profits. OCO and IFD orders preset alternate scenarios.
• Personal Preferences – Pick order types that suit your risk tolerance and active involvement. Simpler is better for beginners.

The optimal order types also depend on whether you are entering new trades or exiting existing positions.

Entry Order Types

For entering new long trades:

• Buy market – For immediate execution in fast markets
• Buy stop – To trade breakouts and momentum
• Buy limit – To trade bounces off support

For new short trades:

• Sell market – For immediate execution in fast markets
• Sell stop – For breakout pullbacks or breakdowns
• Sell limit – To open shorts at resistance

Exit Order Types

To close an open long position:

• Sell market – For immediate exit
• Sell limit – To close at or near resistance
• Sell stop – To exit on break of support
• Trailing sell stop – To lock in profits as price rises

To close an open short position:

• Buy market – For immediate order fills
• Buy limit – To take profit near support
• Buy stop – To close if price breaks resistance
• Trailing buy stop – To protect profits as price falls

Review your trading plan and use the order types that match your strategy and risk preferences.

Top Forex Order Tips

Follow these tips to make the most of forex order types:

• Start with simple market and limit orders to grasp the basics.
• Use wider stops and limits to account for volatility and slippage.
• Be patient with limits. Let the market come to your order.
• Combine orders using OCO and IFD to preset trading scenarios.
• Customize orders per market conditions and pair volatility.
• Don’t overcomplicate. Stick to what makes sense for your plan.
• Review order fills frequently to improve strategy.
• Practice placing orders using a demo account. Develop experience and confidence.

The more adept you become using different forex order types, the better your results will be. Monitor execution regularly to refine your approach.

Common Forex Order Questions

Are all order types available from all forex brokers?

Most brokers offer standard market, limit and stop orders. Some may not have advanced contingent orders. Check your broker’s order types before opening an account.

Do pending orders expire?

Yes, most brokers cancel pending entry and limit orders at the end of the trading day if not triggered. You can renew orders daily if needed. Stops and exits typically do not expire.

Can multiple orders be linked together?

Yes, OCO and IFD orders allow linking multiple entry and exit orders together for more advanced strategies. Platforms like MT4 also allow bracket orders.

What happens to an open position if a stop loss or take profit is hit?

The position will be closed automatically at the predefined stop loss or take profit price. Your trading platform will indicate the closing of the position.

Can limit orders be used to guarantee a profit?

No. Limit orders can set a price target for closing trades but do not guarantee profitability. The market may reverse before reaching your limit price. Manage risk accordingly.

Using Forex Orders Effectively

Here are some final tips for effectively implementing forex orders:

• Watch the spread – The spread between the bid and ask impacts your entries and exits. Wider spreads increase the chance of slippage.
• Consider liquidity – Execute orders when volume and liquidity conditions are optimal for that pair. Low liquidity increases slippage risk.
• Check pending orders – Don’t let pending orders stay too long without checking. The market can move quickly past your price.
• Adjust stops regularly – Actively manage trades by moving stops to lock in profits and reduce risk as the market moves.
• Set alerts – Use price alerts for pending orders to notify you when they trigger. Monitor positions closely.

Executing orders successfully requires paying attention to spreads, volume, and liquidity conditions. Actively manage open trades with stops and limits.

Conclusion

This guide provided a comprehensive overview of forex order types. We explored the mechanics, pros and cons, and optimal use cases for the major order varieties.

The key takeaways include:

• Market orders provide immediate execution but lack price control.
• Limit orders allow you to buy low and sell high at defined prices.
• Stop orders help manage risk by triggering automatic market entries and exits.
• Contingent orders allow linking multiple entry and exit orders for advanced strategies.
• Choose the order types that match your trading style and risk tolerance.

The next step is to practice placing different orders using a demo account. Fine-tune your order strategy over time for your trading plan. Proper use of forex orders is vital to trading success.