In forex, the relationship between the trader, the broker, and the interbank market is shown below. With the internet being the medium, there must be a way by which the interests of the trader are communicated to the broker who carries them out. This “way” is called an order. Orders are used by forex traders to tell the brokers the action to be taken on their account. As such there are different types of orders in forex.
What are Orders in Forex
Orders in forex are “commands” given by the trader to the broker for execution. In the past trading was done over the phone and orders were placed by calling the broker. Today, times have changed and trading is done over the internet and no more calls are placed, although some brokers still support telephone trading.
Since you cannot vocally tell your broker what to do, sets of specific commands were created. Hence, the presence of different types of orders. In this post, I will be going over the major types of orders in forex.
Types of Orders in Forex
There are several types of orders in forex and each one has a specific function. These different orders can be divided into two which are:
- Market order
- Pending order
A market order is one which is filled immediately it is received by the broker. The order tells the broker to open a position at the current market price. This order can be a buy order which is used to open a long position or a sell order which is used to open a short position.
The other types of orders are those which are set for execution at a future time. It could be minutes, hours, or days. These orders are set with certain conditions that must be fulfilled before the order is executed. Upon the fulfillment of all the conditions, the pending order is executed – converted to a market order.
There are different types of pending orders which are set in varying conditions. The different types of stop orders are stop, limit, stop-limit, and OCO orders.
Stop orders are set when it is believed that when prices reach a certain level, they will continue in that particular direction. Hence, a buy stop order is set a price higher than the current market price, while sell stop orders are set below current market price.
Limit orders are orders that are set when price is expected to reverse when they reach certain levels, such as supports or resistances. A buy limit order is set below the current market price in view that once price drops to that point, it will reverse and begin to move upward. The reverse is true for sell limit orders, they are set above current market price.
These type of orders are essentially a combination of two orders. Two levels are set. The stop level is the price at which entry starts, while the limit level is the level at which entry ends. It is used when entering multiple positions, and there is need to guard the price range in which all the positions are opened.
The buy stop-limit order, for example, is set in this manner: the stop level is set above the current market price, while the limit level is set above the stop level. This is because buying starts once the stop level is reached and it stops once the price exceeds the limit level. If the price comes back into the stop-limit range, buying will start again. Thus the positions are all opened within a specific range. This can be especially important during times of high volatility.
For the sell stop-limit order, the stop level is set below the current market price, and the limit level is set below the stop level.
OCO stands for order-cancels-order. This type of order contains the commands for opening two opposite positions. However, once one of the positions are activated, the second is automatically canceled. This order can also be called one-cancels-the-other order.
In conclusion, different types of orders can be used for different situations that arise in the course of trading. The diversity in order types lessens the hassle that would have been otherwise involved in trading some specific parameters.
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