Foreign exchange trading offers investors the opportunity to speculate on currency price movements and profit from changing exchange rates between currency pairs. When placing trades on the forex market, traders must understand the various order types available and how to utilize them effectively according to their trading strategy. In this comprehensive guide, we’ll explore the most common forex order types, how they work, their advantages and disadvantages, and when to use each one.
An Introduction to Forex Orders
A forex order is an instruction from a trader to their broker to enter or exit a trade at specified price levels. Orders allow traders to manage risk and execute trades according to a predefined strategy. The main types of forex orders are:
- Market orders – Execute immediately at current market prices
- Limit orders – Trigger when price reaches a specified level
- Stop orders – Activate when price hits a predefined trigger level
- Take profit orders – Close trades at profitable price levels
- Stop loss orders – Close trades to limit losses if price moves against you
Understanding how to use each order type properly is key to succeeding in forex trading. In this guide, we’ll explore the key differences, pros and cons of each order type so you can utilize them effectively in your own trading.
A market order is the most basic type of forex order. It instructs your broker to immediately buy or sell at the best available current market price.
How Market Orders Work
When you place a market order, it will be executed as soon as possible at the next available price offered by the market. The order may only partially fill if there is insufficient liquidity at the current bid or ask price. Market orders are therefore best suited for highly liquid currency pairs where you can enter and exit positions seamlessly.
For buy orders, the trade will execute at the current ask price. For sell orders, it will execute at the current bid price. The key thing to note is that with market orders, you don’t have control over the entry or exit price. The order will fill at whatever the market price is at the time of execution.
Advantages of Market Orders
- Immediate execution – Your order will execute swiftly at the next best market price. This makes market orders ideal when you want to enter or exit a position urgently.
- Guaranteed fill – Market orders are guaranteed to fill provided there is sufficient liquidity at the current market price. There is minimal risk of “slippage”, which occurs when the actual fill price differs from the expected price.
- Simplicity – Market orders are straightforward with no order restrictions needed. Just enter the amount you want to buy or sell.
Disadvantages of Market Orders
- Uncertain entry/exit price – You don’t know the exact price at which the order will execute. In fast-moving markets, the price can move significantly between order entry and execution.
- Increased risk – Immediate uncontrolled execution can expose you to greater risk in volatile markets where prices are fluctuating rapidly. Stops may be triggered unnecessarily.
- Partial fills – In illiquid markets, a market order may only partially fill due to insufficient volume at the current price. Multiple orders may be needed to achieve the full position size.
When to Use Market Orders
Market orders are best suited to trading:
- Highly liquid currency pairs where sufficient volume exists for seamless execution e.g. EUR/USD, GBP/USD.
- During volatile markets when prices are moving rapidly and execution speed is a priority.
- To exit losing trades swiftly and minimize further losses.
- When opening or closing large positions across multiple smaller orders to get the best average fill price.
Avoid using market orders when:
- Trading less liquid currency pairs where wide spreads and price gaps are common. Use limit orders instead.
- You want control over the specific entry or exit price.
A limit order allows you to specify the exact price at which you want to enter or exit a trade. The order will only trigger if the market price reaches the limit price specified.
How Limit Orders Work
With a limit order, you define the maximum price to pay when buying, or minimum price to receive when selling.
For a buy limit order, the trade will only execute at or below the limit price. For a sell limit, it will only execute at or above the limit.
The order will remain pending until the market price matches the limit price, at which point it is triggered. If the limit price is never reached, the order will not execute.
Limit orders give you control over the entry or exit price, allowing trades to be executed at ideal levels aligned with your strategy. However, there is a risk of “slippage” if prices gap beyond your limit before the order is filled.
Advantages of Limit Orders
- Price control – Execute trades at desired entry or exit levels. Set limits at psychologically significant price points.
- Manage risk – Limit orders allow you to trade with precision and mitigate excessive risk taking. Maintain discipline per strategy.
- Enter trends – Use limit orders to get into emerging trends at pullback levels after an initial breakout.
Disadvantages of Limit Orders
- Not guaranteed to fill – If the market price doesn’t reach your limit, the order won’t execute. Monitor and adjust limits.
- Potential slippage – In volatile markets, gaps can occur causing slippage beyond your limit price. Use stop-limit orders.
- Requires monitoring – Check pending orders frequently to ensure limits remain relevant as markets update.
When to Use Limit Orders
Limit orders are useful in many situations:
- Trading range-bound or consolidating markets. Buy at support, sell at resistance.
- Controlling entry on retracements or breakouts. Set limits at key chart levels.
- Exiting trades at predetermined profit targets. Close winners strategically.
- Providing protection from adverse price gaps. Use stop-limit orders instead of stop orders.
Avoid using basic limit orders when:
- Trading highly volatile instruments prone to large, rapid price gaps.
- You need to enter or exit positions urgently. Execution speed is low.
- You lack time to frequently monitor and adjust limit levels if unfilled.
Stop orders allow you to set a trigger price at which the order becomes activated and turns into a market order. This lets you automatically enter or exit trades based on momentum and price action.
How Stop Orders Work
A buy stop order will trigger a buy trade when the price rises to a predefined level. A sell stop activates a sell trade if the price falls to the specified level.
Once the stop price is reached, the order becomes a market order and immediately executes at the next best available price. This means you don’t have control over the fill price once the order triggers.
Stops are primarily used to limit potential losses. By setting a stop loss below the current price, you can restrict your risk if the market moves against you.
Advantages of Stop Orders
- Risk management – Predefine exit points to limit losses. Close losing trades automatically.
- Discipline – Remove emotion by setting stops based on strategy rules, indicators etc.
- Capture trends – Use stops to enter on breakouts when key levels are breached.
- Flexibility – Pending stop orders allow you to set exits in advance before entering a trade.
Disadvantages of Stop Orders
- Vulnerable to slippage – No control over the final fill price, gaps can result in slippage on activation.
- Stop clustering risk – Stops concentrated at a certain level can exacerbate slippage when triggered.
- Whipsaws – Tight stops prone to being triggered prematurely during choppy price action.
When to Use Stop Orders
Stop orders have many applications:
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- Use stop losses on all trades to restrict potential losses if the market moves against you.
- Trail stops below price during uptrends to lock in profits. Raise as price makes new highs.
- Employ stops on breakout strategies to capitalize when key support or resistance levels are breached.
- Use stops to exit profitable trades at predefined target levels or when indicators signal.
Avoid using basic stop orders:
- In volatile markets where gaps are common. Use stop-limit orders instead.
- On illiquid currency pairs with wide spreads and large gaps. Slippage risk is higher.
- For entries where precision is vital. The fill price is uncontrollable after a stop triggers.
Take Profit Orders
A take profit order closes out an open trade when price reaches a predefined favorable level. It helps secure profits at ideal levels aligned with your strategy.
How Take Profit Orders Work
A take profit order sets an exit price where you want to close a winning long trade for profit. Once the price reaches or exceeds the specified level, it triggers a market order closing the trade.
For short trades, the take profit functions conversely. The order triggers a market order to close the trade when the price falls to the defined level.
Take profits allow you to exit trades according to your objectives without manually monitoring the market. If the price doesn’t reach your take profit level, the trade remains open.
Advantages of Take Profit Orders
- Lock in profits – Close winning trades at predetermined optimal levels.
- Effective risk management – Take profits complement stop losses in controlling potential losses.
- Objective trading – Remove emotion from exits once take profits are reached.
- Flexibility – Pending take profits can be adjusted or canceled at any time if not yet triggered.
Disadvantages of Take Profit Orders
- Limits profit potential – Closing trades prematurely can leave profits on the table.
- Vulnerable to gaps & slippage – No control over the closing price once market order triggered.
- Requires monitoring – Adjust levels if targets looking unlikely while trade open.
When to Use Take Profit Orders
Take profits have many uses:
- Exit breakout trades after initial momentum surge as prices peak.
- Close trades when chart or indicator signals suggest upside exhaustion approaching.
- Bank profits at key technical levels where resistance may halt further upside.
- Exit trades once predefined profit objectives have been met.
Avoid using basic take profits:
- On volatile pairs with large gaps. Use take-profit limit orders instead.
- On positions you want to give room to run profits further. Use a trailing stop.
- On trades with no clear price target. Close selectively based on price action.
Stop Loss Orders
A stop loss order exits a trade automatically once price moves against you by a predefined amount. It aims to restrict losses and protects your trading capital.
How Stop Loss Orders Work
With a stop loss, you set the maximum loss you’re willing to accept on a trade. If the market moves against your position and hits your stop level, a market order closes the trade immediately.
For long trades, the stop loss order would trigger a sell order when the price fell to the specified level. For shorts, the stop triggers closing buy orders when the price rises to the defined level.
Stop losses enforce risk management discipline by taking you out of losing trades before losses exceed your limits. However, slippage can occur beyond your stop level during volatility.
Advantages of Stop Loss Orders
- Control risk – Predefine maximum loss so losers don’t impact capital dramatically.
- Enforces discipline – Traders often lack objectivity without stops. Automated exits improve decisions.
- Allows open trades to run – Trade without monitoring by setting wide stops giving room for profits.
- Pending orders – Place stops in advance before entering positions.
Disadvantages of Stop Loss Orders
- Vulnerable to slippage – No control over exit price once stop market order triggered.
- Whipsaws – Choppy price action can knock out tight stops prematurely.
- Doesn’t guarantee against losses – Losses can still exceed stop level during extreme volatility.
When to Use Stop Loss Orders
Stop losses are recommended in most trading situations:
- Use a stop on every open trade to control potential losses if the market reverses.
- Place stops below key support levels, moving averages or volatility bands.
- Utilize wider stops that allow price action some room to fluctuate normally.
- Trail stops below the market during uptrends to protect profits.
Avoid using basic stop loss orders:
- On volatile instruments or during news events. Use stop-limit orders instead.
- On illiquid assets with large spreads where slippage risk is high.
- On trades taken based on a longer-term view. Use options like trailing stops.
Trailing Stop Orders
A trailing stop tracks the market price at a defined offset as the price moves in your favor. It secures profits on winning trades while allowing further upside.
How Trailing Stop Orders Work
As the market price rises after you buy a long position, the trailing stop price rises at a fixed distance below the market price. If the market later reverses, the stop will trigger a sell order once hit.
For short trades, the trailing stop moves up as the price drops and will trigger a close when the price eventually rises back up to the stop level.
The dynamic nature of trailing stops allows you to lock in profits on trades while still giving the position room to further increase in value if the trend continues.
Advantages of Trailing Stop Orders
- Locks in profits – Exits trades automatically at ideal levels after sizable gains.
- Flexible – Adjustable offset distance lets you increase or decrease stop aggressiveness.
- No monitoring required – Trades can run without watching charts as stop trails price.
- Gets you into trends – Entry stop orders let you join uptrends on pullbacks.
Disadvantages of Trailing Stop Orders
- Potential for whipsaw exits – Choppy price action can knock out trailing stops.
- Vulnerable to slippage – No limit control once stop market order triggered.
- Locks in losses – Falls in price raise the stop level ratcheting losses if hit.
When to Use Trailing Stop Orders
Trailing stops are useful in many trading scenarios:
- Protect profits during sustained uptrends. Let winners run further.
- Close out breakouts after initial price surge and momentum wanes.
- Trade on price retracements. Entries with stops trail price higher on upside break.
- Automate trend-following strategies without monitoring charts.
Avoid using basic trailing stops:
- On choppy assets where price oscillates in a range. Too many premature exits.
- If minimal upside target, use a fixed take profit level instead.
- On volatile pairs. Use trailing stop limits instead to better control slippage.
Entry Stop Orders
Entry stops trigger buy or sell trades when the price breaks key levels, allowing you to enter on momentum in the direction of the prevailing trend.
How Entry Stop Orders Work
A buy stop order enters a long trade when the price breaks above resistance or an upside price level. The order triggers based on upward momentum.
For short trades, a sell stop order activates if the price breaks down through support or a defined downside price target.
Once the stop price is hit, the order becomes a market order rapidly entering your position. Entry stops help get you into emerging trends early as key levels break.
Advantages of Entry Stop Orders
- Captures momentum – Enter strongly trending moves as price breaks out.
- Predefined risk – Known stop loss levels can be set based on stop entry.
- Removes subjectivity – System rules determine entries objectively.
- Flexibility – Pending stops can be adjusted to follow the market.
Disadvantages of Entry Stop Orders
- Vulnerable to false breaks – Whipsaws can trigger stops prematurely entering countertrends.
- Risks slippage on entry – Market orders fill at next available price after triggering.
- Requires monitoring – Pending stops must be monitored and adjusted at times.
When to Use Entry Stop Orders
Entry stops have applications in many types of trading strategies:
- Trade breakouts when key support or resistance levels are breached.
- Join trends after pullbacks during overall uptrends. Place buy stops above retracement high.
- Structure breakout strategies with predefined entry, stop loss and take profit levels.
- Automate trend-following methodologies where entries get triggered on momentum.
Avoid using basic entry stops:
- In choppy, directionless markets where false breaks are common.
- On illiquid assets where slippage risks are high when stops trigger.
- If you require precision entries. Use stop-limit orders instead.
Stop-limit orders aim to negate risks associated with slippage by adding a limit to your stop order execution. This helps control entry or exit prices when volatility is high.
How Stop-Limit Orders Work
A stop-limit combines the trigger action of a stop order with a price limit on execution. When your stop level is reached, a limit order activates rather than a volatile market order.
The limit ensures the order won’t fill above or below a defined price, protecting you from unfavorable slippage gaps as stops trigger. If the limit isn’t reached, the order won’t execute.
For long trades, your buy stop-limit order would trigger a buy limit when the price trades at or above your stop level. For shorts, a sell stop-limit enters a sell limit.
Advantages of Stop-Limit Orders
- Controls slippage – Limits cap how far your entry or exit price can stray from the stop trigger.
- Precision – Combination of stop and limit allows tighter control over order fills.
- Risk management – Limits provide an extra layer of protection from adverse price gaps.
Disadvantages of Stop-Limit Orders
- May not fill – Limits add another condition for execution.
- Complex – Require more planning with two price conditions to monitor.
- May require adjustments – If unfilled, stop and limit levels may need amending.
When to Use Stop-Limit Orders
Stop-limits provide enhanced order control in many situations:
- Use stop-limit exits on volatile assets where price gaps are expected.
- Set stop-limit entries on breakouts you want to trade with precision.
- Replace basic stop losses with stop-limit stops to restrict slippage risk.
- Utilize stop-limit take profits to close trades at defined profitable prices.
Avoid using stop-limits:
- In slow, ranging markets where limits hinder execution. Use basic stops.
- If you need to guarantee execution. Limits raise the chance of unfilled orders.
- On low-spread, highly liquid instruments. Simple stops suffice when slippage minimal.
OCO (One Cancels Other) Orders
OCO orders combine two linked stop or limit orders sharing a single entry order. When one OCO order fills, the other is automatically canceled.
How OCO Orders Work
OCO orders are typically used to exit profitable trades at predefined take profit or stop loss levels. This allows you to set both a stop and limit when entering.
For example, combining a stop loss and limit take profit. If either the stop or limit is hit first, the other exit is canceled. This ensures you exit only once per entry.
The dual order structure locks in some profit via the limit exit if reached, while restricting full downside per the stop loss if price reverses unfavorably.
Advantages of OCO Orders
- Simultaneous trade management – Set profit taking and loss stopping rules together.
- Locks in gains – Take profits let you bank some profits when able.
- Limits losses – Stops restrict your maximum loss if the market turns.
- Efficient exits – Automatically cancel the other order after one or the other fills.
Disadvantages of OCO Orders
- Potential for limited gains – Take profits can cut winners short prematurely.
- May not fill completely – No exit if neither take profit nor stop loss reached.
- Complex – Monitoring two exit levels and possible cancelations requires some skill.
When to Use OCO Orders
OCO orders provide flexible exit control across different strategies:
- Employ on breakout trades. Stop loss beneath entry with take profit on upside projection.
- Structure swing trades using OCO. Close on retracements or upward breakouts.
- Manage trades entered based on indicator signals or events. Set exits according to rules.
- Automate technical strategies where entries close on price hitting key levels.
Avoid using OCO orders:
- If minimal upside projection, use a simple stop loss instead.
- On trades taken based on a longer-term view. Use trailing stops.
- If psychology prone to moving or canceling exits frequently. Keep orders simple.
If Done Orders
If done orders link two orders together where the second order only activates if and when the first order fills. This allows managing trades in advance.
How If Done Orders Work
With an if done order, the two orders are connected by a condition – “if Order A executes, then also submit Order B”.
For example, you could set a stop loss on an entry order, so the stop is submitted simultaneously once your entry order fills.
This structure helps traders manage both the entry and exit of a new trade together as a pair, without needing to manually place the second order after entry.
Advantages of If Done Orders
- Predefined trade management – Submit connected entry and exit orders together.
- Saves time – No need to place the secondary order manually later.
- Maintains discipline – Exit rules are locked in upfront with the entry.
- Flexible – If done orders can link any two orders based on needs.
Disadvantages of If Done Orders
- Less adjustability – Both orders are sent together, unable to be amended one at a time.
- Complex – Linking multiple orders with secondary conditions requires precision.
- May hinder best execution – Entries and exits automated together regardless of price action.
When to Use If Done Orders
If done order pairing works well in many trading approaches:
- Automate breakout strategies with entry stop and stop loss if done orders.
- Manage swing trades with entry limits and profit taking limit if done orders.
- Set stop losses, take profits or trailing stops if done on entries to manage trades.
Avoid using if done orders:
- If you prefer assessing price action at each step rather than automating the process.
- On complex strategies with more than two connected orders required. This can get disorganized.
- If you change trade plans frequently. Amending if done orders can be complicated.
Understanding order types is imperative for forex traders looking to implement strategic trades with controlled risk parameters. The right order selection depends greatly on trading style, strategy rules, and market conditions. Mastering the nuances of different order types takes practice, but is a key factor dictating trading success.
Whether using market orders to enter momentum trades swiftly, stop losses to enforce risk discipline, or OCO orders to manage exits effectively, order types provide the building blocks for traders to construct organized trades. Assess your own strategy needs, then judiciously apply the order tools necessary to execute your plan decisively. Your trading consistency and profits will soon improve.
Frequently Asked Questions
What are the main forex order types?
The most common forex order types are:
- Market orders – Execute immediately at current market price
- Limit orders – Trigger when the price reaches your specified level
- Stop orders – Activate when the price hits your predefined trigger level
- Take profit orders – Close trades at profitable price levels
- Stop loss orders – Close losing trades to restrict losses
Which order type has the highest priority?
Market orders typically have the highest priority and will execute first at the next best available price. Limit and stop orders are pending orders which only trigger under their predefined price conditions.
When would I use a limit order vs a market order?
Use limit orders when you want control over the entry or exit price. They allow you to specify the exact price to execute at. Market orders are better when you need to execute immediately at the current market price.
How do I choose the right stop loss order price?
Stop losses are typically placed at psychologically significant levels, below nearby support areas, or based on volatility or technical indicators. Wider stops allow more room for normal price fluctuations. Tighter stops further limit potential losses.
What’s the main benefit of using OCO orders?
OCO (One Cancels Other) orders allow setting two linked exit orders when entering a trade. This lets you manage both your profit taking and stop loss levels simultaneously. When one exit order fills, the other is automatically canceled.
Can I use multiple order types together?
Yes, order types can be combined to create strategic sequences. For example, entering on a stop order then managing exits with OCO take profit and stop loss orders. Get creative mixing different order types for advanced trade execution.
Should I always use stop losses on trades?
Stop losses are highly recommended in most trading strategies to control potential losses. However, very wide stops giving the trade room may be preferable at times over tight stops that increase chances of whip saw exits.
What happens if pending orders don’t trigger?
If the market price never reaches your specified limit or stop level, the pending order will not execute. You can continue monitoring the order and amend it as needed if it remains unfilled for too long.
How do I cancel or modify orders?
Most trading platforms allow you to easily cancel or edit unfilled pending orders at any time. Open orders can be amended by adjusting the price levels or criteria until the order closes or executes.
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