#6: The Different Types of Forex Orders

Back in my prop trading days as a futures trader...

I was using different trading software and that particular software exposed me to the different types of orders out there.

You have stuff like machine gun order, iceberg order, and stuff like that.

But as a retail FX trader, you don't really need to know what are the hundreds of different variations, of orders out there.

All you need to know is, generally, these four types of orders that I'm going to share with you and you're pretty much good to go.

What are the four types of orders?

Here are the following:

  • Market Order
  • Limit Order
  • Stop Order
  • Stop-Loss Order

I'm going to explain to you what are these four different types of orders and the pros and cons to it.

Here we go…

Market Order

A market order is that you want to enter the market at the current price.

For example, you are looking at a chart in the market and you tell yourself…

"Man, I got to be in this move. I got to enter the market right now."

If you want to enter the market right now, you will use a market order.

You know for sure you'll be in a trade because you're basically entering the market right now.

However, the market might retrace and could give you a better price.

So, the downside to this is that you will pay a premium.

Here are the Pros and Cons:

Pros: You know for sure you’ll be in the trade.

Cons: You pay a premium.

Moving on…

Limit Order

You only enter the market if the price comes to your desired level.

Let’s say, the market is trading higher.

You don't want to go long at the current price.

You think it's too overbought, it's too high.

So instead, you want to buy at a lower price.

What you can do is you can put in a limit order at a lower or desired price.

If the market does come back lower and hit your lower price level, you will be filled on your trade.

This is what I mean by entering only if the market comes to your desired level.

The pros are that you will be entering your trade at a cheaper price and this would naturally improve your risk to reward.

The downside to this is that you might miss the move because the market doesn't necessarily have to come to the level that you are waiting for and you might miss the move.

The second thing is that you are trading against the current momentum.

What this means is that if the market is trading higher, you place a limit order, it comes back down.

You're basically entering against the current momentum that is against you.

Of course, there are ways to circumvent this…

You could wait for a reversal candlestick pattern before the market does a higher close and then you enter the trade.

Here are the Pros and Cons:

Pros: Enter at a “cheaper” price.

Cons: Might miss the move and trading against current momentum.

Keep reading…

Stop Order

This simply means that you only enter the trade if the market moves in your favor.

For example, the market could be in a range.

You want to trade the breakout of the range.

What you can do is that you can put a buy stop order at the breakout price.

So that if the market trades and hit this level, only then will you be filled on the trade to go long.

Here are the Pros and Cons:

Pros: Enter trades with momentum.

Cons: Might be a false breakout.

And finally…

Stop-Loss Order

This type of order is slightly different from the earlier orders.

Because the earlier three orders are orders to get you into a trade, an entry.

Whereas a stop-loss order is to get you out of the trade. It's an exit.

Let's say, you buy at support in anticipation the market will to continue trading higher.

But what happens is that the market collapses lower.

Let’s say you have a stop-loss order below support.

If it hits your stop-loss level, you will be out of the trade for a loss.

This kind of limits your downside.

Imagine if the market collapses all the way lower and you don't have a stop-loss.

Your initial loss could have been bigger.

So, a stop-loss order is simply a defensive mechanism to protect your capital if the market goes against you.

Cutting your losses means that you live to fight another day.

You don't blow up your entire trading account, and like I've said, it's a defensive measure.

The bad side is that the market could reverse back in your intended direction.

But I would rather get stopped out of my trade and get a small end bite than get a big crocodile bite.

Here are the Pros and Cons:

Pros: Cut your losses by not blowing your entire account.

Cons: The market could reverse back in your direction.

Recap

  • A market order is where you enter the trade right now.
  • A limit order is where you want to enter at a cheaper price.
  • A Stop order is where you want to enter at a higher price (breakouts).
  • A Stop-Loss order gets you out of your losing trade and protects your capital.
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