Learn in this article how to use the different trading order types, from instant execution market orders, to limit and stop orders, available on most trading platforms. We will be illustrating when to use them and the reasons for applying each type, along with their advantages and disadvantages.
Market Order Types
The standardised trading order types in Forex are instant execution market orders and pending orders: Buy Stop, Sell Stop, Buy Limit, Sell Limit, Stop Loss and Take Profit.
Pending stop or limit orders, which come in the form of entries, are also called pending stop entry order or pending stop limit order. Stop entry orders are orders to fill forward of the intended price direction (to confirm price direction), and limit entry orders are orders to fill backward in temporary retracement of the intended price direction (to enter at better price).
Stop and Limit Orders can come in the form as exits as well. The common exit, Stop Loss, is a pending stop order, while Take Profit is a pending limit order. We will examine these after covering the pending entry orders.
What is a Buy Stop Order?
A buy stop order is a pending order to buy an asset at a specified higher price. It’s an order placed above the current market price, on a market trending up. Buy stop orders are a good method to use for trading breakouts on bullish trends.
Bullish traders can place a buy stop order on the break of the recent high (resistance level), in the hope that after the consolidation period, the underlying uptrend continues to make new highs.
This type of strategy can be used to profit from an upward movement in an instrument's price, by placing a pending buy stop order in advance to enter the market when the price surpasses a particular point (last high, or a resistance level), to ensure a greater probability of achieving a predetermined entry price.
The buy stop price is entered at a target level and the order will remain pending. Only when the price of the instrument reaches the determined stop price, or the next session opening price surpasses the predefined entry level (in case of a very common weekend gap up opening), the buy stop order becomes a buy market order.
What is a Sell Stop Order?
A sell stop order is a pending order to sell an asset at a specified lower price. It’s an order placed below the current market price, on a market trending down. Sell stop orders are a good method to use for trading breakouts on bearish trends.
Bearish traders can place a sell stop order on the break of the recent low (support level), in the hope that after the consolidation period, the underlying downtrend continues to make new lows.
This type of strategy can be used to profit from an downward movement in an instrument's price, by placing a pending sell stop order in advance to enter the market when the price surpasses a particular point (last low, or a support level), to ensure a greater probability of achieving a predetermined entry price.
The sell stop price is entered at a determined level and the order will remain pending. Only when the instrument price reaches the determined stop price, or the next session opening price exceeds the predefined entry level (in case of a very common weekend gap down opening), the sell stop order becomes a sell market order.
What is a Buy Limit Order?
A buy limit order is a pending order to buy an asset at a specified lower price. It’s an order placed below the current market price, on a market trending up. Buy limit orders are a good technique to use for trading retracements on bullish trends.
Bullish traders can place a buy limit order on the retracement level of a recent low (support level), in the hope that after the consolidation period, the underlying uptrend continues to make new highs.
This type of strategy can be used to profit from a retracement movement in an instrument's price, by placing a pending buy limit order in advance to enter the market when the price retraces to a particular point (last low, or a support level), to ensure a greater probability of achieving a predetermined entry price.
The buy limit price is entered at a set level and the order will remain pending. Only when the instrument's price reaches the determined limit price, or the next session opening price surpasses the predefined entry level (in case of a very common weekend gap down opening), the buy limit order becomes a buy market order.
What is a Sell Limit Order?
A sell limit order is a pending order to sell an asset at a specified higher price. It’s an order placed above the current market price, on a market trending down. Sell limit orders are a great way for trading retracements on bearish trends.
Bearish traders can place a sell limit order on the retracement level of a recent high (resistance level), in the hope that after the consolidation period, the underlying downtrend continues to make new lows.
This type of strategy can be used to profit from an downward movement in an instrument's price, by placing a pending sell limit order in advance to enter the market when the price retraces to a particular point (last high, or a resistance level), to ensure a greater probability of achieving a predetermined entry price.
The sell limit price is set at a determined level and the order will remain pending. Only when a security price reaches the determined limit price, or if in the next session the opening price surpasses the predefined entry level (in case of a very common weekend gap up opening), the sell limit order becomes a sell market order.
What is a Stop Loss Order?
Traders use stop loss orders to limit potential losses. One of the most effective ways of limiting losses is through a pre-determined stop order, called a stop loss.
Below is an example of a buy stop order used in conjunction with a stop loss.
As you can see on the above Daily USD/CHF chart, there is a pending buy stop order at the price of 0.89202, above the last daily high. There is also a stop loss at the price level of 0.88802.
Thus, if the market moves up and fills the pending buy stop order at 0.89202, the stop loss level will be active at the set level of 0.888802, and there will no need to come back to the order and set a stop loss level.
If the trade becomes profitable by a certain number of pips, it is generally a good idea to move the stop loss in the profitable direction to protect some of the profit.
On a profitable long position, the stop loss order can be set to the breakeven level, or profit zone, to safeguard it against the chance of a market reversal against the currently profitable position.
Determining the profit threshold for when one should move the stop loss to protect the position, or the profit, is the tricky part.
Traders should set the stop loss to also allow for the trade to have room to breathe, to be free to develop, instead of setting a tight level and exiting the trade on an insignificant correction.
What is a Take Profit Order?
As it is a good idea to have a stop loss order in place before placing a trade, it is a good idea to have a profit target in place. A pending limit order allows traders to exit the market at a pre-set profit goal, called a Take Profit.
Below is an example of a buy limit order used in conjunction with a stop loss and a take profit.
As you can see on the above Daily USD/CHF chart, there is a buy limit order set at the price of 0.88842, the R1 level. There’s also a predefined stop loss at 0.88532, 31 pips below the intended entry, and a predefined take profit at 0.89202, 36 pips above the intended entry price.
So, if the market moves down and fills the pending buy limit order at 0.88842, the stop loss and the take profit levels will be active at the pre-set level of 0.88532 and 0.89202, and there is no need to come back to the order and set a stop loss or a take profit level.
Adding, or modifying, a stop loss or a take profit in the MT4 platform can take a few steps and seconds. Moreover, all modifications are on the price alone, not the pips, as we saw, which can add to the delay as one tries to scroll to the specific price.
What are Market Orders?
Instant execution Sell by market order and Buy by market order are the most common type of orders and used to execute an order immediately at the next available market price.
Traders entering a long trade, for example, to buy a currency pair, will buy at the next available “ask” price, and traders entering a short trade to sell a currency pair, will sell at the next available “bid” price.
Usually, with STP or ECN Forex brokers, the quotes displayed on the trading platform, streamed as the tradable prices (the best bid and offer) collected from 10 or more top-tier banks. If a trader decides to open or close a position, the order gets executed at the best price available on the market straight from the liquidity providers.
Depending on how the broker has set up their execution technology, the market order will be either an Instant Execution or Market Execution. What is the difference? An instant execution broker allows traders to place the stop loss and take profit levels at the same time as the market order, whereas a market execution broker allows traders to place a market order only, without an initial stop loss and take profit.
Only after the order is open can traders go back and change the order to include a stop loss and take profit. How can you tell them apart? When you open the market order window, you can spot the distinction.
You can see in the image above an USD/CHF market order with the options to change the volume, that is, how many lots you want to trade (in this example, 0.01 = 1 micro lot), an option to change the stop loss and the take profit levels. Being able to show the stop loss and the take profit at the same time as opening an order can be very handy.
It saves traders the trouble of adding them in later, or forgetting and leaving a position open without the safety and the gains levels input. The main advantages of this method are the speed and the convenience.
In the above example, when a trader is entering a buy on a currency pair, it will be buying at the ask (Buy) price, visualised above the blue Buy box, and also as the blue tick line in the left chart window. If a trader is entering a sell on a currency pair, it will be selling at the bid (Sell) price, seen above the red Sell box, and also as the red tick line in the left window.
A market order requests immediate execution, and this is a good thing when traders definitely want to be in the trade now, without delay. Because immediacy of execution is very important, market orders are the most popular form of entering trades and also because of Forex huge liquidity, market orders generally get filled at the displayed bid and ask prices, with least slippage, re-quotes and errors.
At times a market order can and it will suffer from slippage and re-quotes during volatile periods, such as the periods occurring during critical news announcement. The market order, bid and ask prices, may be re-quoted, not because the broker is using less ethical tactics, but because the current market price may have changed since the last market snapshot.
Closing a position by market is the fastest way of exiting a trade without any delay. To do so, traders using the MT4 trading terminal, need to double click on any open order, right under any of the “Price” tabs.
The trading terminal opens and now there’s a highlighted box in yellow called Close #xxxxx buy 0.02 EURJPY by Market. The quoted close price is the quoted bid (sell/red) price if the open order was a buy, and it is the quoted ask (buy/blue) price if the open order was a sell.
Pressing this yellow bar, the ticket order will close at the current market price. This quoted close by market price updates every millisecond with new prices, so traders can keep it open and let prices move to where they want before pressing the bar.
Once traders know the different types of orders (market, stop and limit), and become comfortable using them, they can apply them to better fulfil a trader’s intentions of how to best enter and exit the trade.
There are pros and cons to each order type and these are only learned through practice. Knowing the order type is only the how, it does not help with the where and when – which would be up to a trader’s analysis or strategy to determine.
In the end, you might prefer one type of execution over the others, or you might use a flexible combination of the order types relative to the market conditions.
