New Trader Basics: Forex Order Types
Knowing what each order type means and how it affects you is some of the most vital knowledge you need to have. Below I discuss the most commonly used and important forex order types used in trading. Make sure you are placing the right order based on what you want to achieve in the trade. This will help you prevent many of the mistake-based losses that come from incorrect order placement.
This is the simplest to understand and one of the most used forex order types. You are buying or selling at current price. There is normally a difference in the price that you can buy or sell for. This is known as spread and is the difference between the “bid” and “ask” price. This ensures that you will always be at a slight loss when you open a position. It is a common practice and one of the most basic costs in trading.
Buying or selling “at market” gets you into the trade right away and there is no waiting. There are some exceptions – read my article on “slippage” for further explanation. You can also use a market order to close an open trade as well and it operates the same way.
Limit Entry Order:
This is best described as an order placed ahead of time. It attempts to get you into the market at a “better” or more favorable position relative to the direction you want to trade than where the market is currently sitting when you want to get in the trade. For example if you want to buy a forex pair or “go long”, a limit order would be placed if you wanted to get into the market at a lower price.
For a sell trade or a “short”, the limit is set higher than current price. This would be more favorable to a sell position than market price. Keep in mind that there is no guarantee that the market will reach your limit and be entered. But it is a very commonly used order when traders would like to see price “come back” a bit before entering, such as above a support or resistance level.
Stop Entry Order:
A stop order is one of the forex order types that allows you to place an order ahead of time but the opposite of limit. It is not to be confused with a “stop loss”. A stop entry order gets you into the market at a “worse” or less-favorable position relative to the direction you are desiring to trade. For example if you want to buy a pair or “go long” you would place the stop entry at a higher price than market price. As the market moved up to your order point you would get into the trade. Although this seems counter-intuitive, there are situations where this is a very favorable entry. For example, wishing to make sure price has crossed a certain s/r area before entering, or adding to a position as price moves along in your favor. It depends on the approach, and system, and is the least common of the 3 discussed entry types.
New Trader Basics: Forex Order Entry Types
Those are the three primary and main entry types in forex trading. It is important that any new trader understands the difference between them to use them effectively in their desired style of trading.
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