Order Types

Last time we looked at BUY and SELL orders. We determined that BUY means buying the Base Currency of a pair (while at the same time simultaneously selling the Quote Currency) and that SELL means buying the Quote Currency and paying for it with the Base Currency.

Buying or selling instantaneously can be done with the click of a button in your trading platform software and this type of order is called a Market Order. There are also other ways to place an order or to modify an already open order.

Market Orders

A market order is an order to buy or sell immediately, at the current market price. For example, USD/CHF is currently trading at Bid:1.2140 / Ask:1.2143. If you wanted to buy at this exact price, you would click buy in your trading platform and that would instantly place a buy order at the Ask price.

It's like online shopping - you like the item, you like the price, you click and it's yours! The only difference is you are buying or selling one currency against another currency.

Limit Orders

A Limit order (a.k.a. "delayed order" or "pending order") is an order to Open a new buy or sell position at some time in the future, when the price reaches certain value.
Placing A Pending Order In MT4
The order essentially contains two variable: desired price and duration. You specify the price at which you wish to buy/sell a certain currency pair and also specify how long you want the order to remain active. After this time expires the order will not be triggered even if the price reaches the desired level.

Example:

USD/CHF is currently trading at 1.2050. You want to go long if the price reaches 1.2070. You can either sit in front of your charts and wait for it to hit 1.2070 (at which point you would execute a BUY market order), or you could set a pending order at 1.2070. This way you don't need to sit there and stare at your computer waiting for the price to reach 1.2070 - you could go about your other business knowing that as soon as the price reaches 1.2070 your order will be executed!

Stop-Loss and Take-Profit Orders

Stop-loss (SL) and Take-profit (TP) orders are the opposite of Limit Orders - they tell the broker to Close an open position at a certain price.

The Stop-Loss order tells the broker to close an open trade for the purpose of preventing losses if the price goes against you. A Take Profit order closes an open order at a certain price for profit. Again - you execute these orders from your trading software and you specify the levels at which you want the Take-Profit or Stop-Loss action to be triggered.

Both types of orders remain in effect until they are triggered (i.e. if the price reaches the TP or SL level) or until the position is closed by the trader. Also you can manually cancel the stop-loss and take-profit orders. On any open position you can set one SL order or one TP order or both, a SL and a TP order. Setting both orders is the preferred action. Some trading terminals like Meta Trader 4 allow you to set both the SL and TP at the time of placing your order. Even if you don't want to use Take Profit, at the very least always use a Stop-Loss order on all of your open positions.

Example:

You went long (buy) USD/CHF at 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and USD/CHF drops to 1.2200 instead of moving up, your broker's system would automatically execute a Stop-Loss order at 1.2200 and close out your losing position for a 30 pip loss.

Painful as it may be, there will be times when you will be wrong and the SL order must be there to protect you. Imagine what would have happened if you didn't have the SL order in place and you woke up the next morning to see the price down at 1.2030 (ouch!). Instead of the 30 pips you would have lost 200 pips! ALWAYS trade with a Stop Loss!

Similarly the TP order will collect your profit without you having to monitor your open trades all the time.

Stop-Losses and Take-Profits are extremely useful if you don't want to sit in front of your monitor all day worried that you will lose your money. You can simply set a stop-loss order and a take-profit order on any open positions and go camping, dancing, sleeping... whatever!

The nice thing about the Pending Orders, Stop-Loss Orders and Take-Profit Orders is - they are placed through your trading platform but they are stored, monitored and executed on the broker's side. This way, even if you lose your internet connection or there is some other trouble with your computer, your broker's server will automatically execute the orders at the correct price.

Trailing Stop Orders

IMPORTANT: Be aware that in Meta Trader 4 the Trailing Stop Orders work in the client terminal and if you close the MT4 terminal your TS order will not work. This is one limitations of the MT4 platform compared to, for example the Trading Station platform, where all orders are stored in the broker's servers. The other orders are always kept on the broker's side - only the TS type of order is different in MT4.

A clever combination between the Take Profit and Stop Loss order is the Trailing Stop order. Stop Loss is intended for reducing of losses where the symbol price moves in an unprofitable direction. If the position becomes profitable, Stop Loss can be manually changed to a break-even level, in other words a level at which the position will be closed at a 0-gain level. This is actually a tactic recommended by many seasoned traders and I fully recommend it too – if you don't allow your trades to become losers you will protect your profits!

To automate the above process, the Trailing Stop (TS) type of order was invented. This tool is not offered by all trading platforms but most of the advanced ones (MT4, FXCM's “Trading Station”) do offer it. This is a special Stop Loss Order which is not fixed at a specified price but rather follows your position X pips away from the price. It basically works like a one-way valve – it follows the price while it moves in a favorable direction (up for your BUYs and down for your SELL orders). As soon as the currency starts moving against you, the TS order will stay in place and if the price eventually crosses it, your position will be closed at that level, at a profit instead of a loss! You enter the number of pips you want your TS order to use when you set the TS order.

As you can see this is what I was talking about when I said earlier that one of the major advantages of the Forex market is that it is very easy to automate your trading. Place your orders and go fishing :)
You can even automate it completely if you use special software like Forex-Autopilot or the Forex Killer System, which predict the moves of the market and alert you so that you know which currencies to trade and whether to Buy or Sell.