Many forex traders, particularly those who are new to the forex market, are totally unaware that there are different order types. So they simply call up their broker and tell him that they want to buy a given currency pair, gold, oil or dow jones. And the problem with that?
Unless you name a specific price, you’re giving your broker permission to fill your order at any price.
The good thing is that you’re guaranteed to get filled as long as there’s trading activity – meaning buyers and sellers making a market.
It’s the price that’s the problem.
Would you go to your favorite store and tell the salesperson that you’ll take those jeans at any price or head for the gas station to fill up for whatever the pump jockey wants to charge you? No way – you don’t want to get ripped off.
But that’s exactly the risk you’re taking in forex trading in Ghana if you don’t tell your forex broker what you’re willing to spend. For example, “I want to buy 1 Forex Lot of EurUsd but pay no more than 1.2240 USD for 1 Eur.”
Doing so takes away the advantage afforded to the much bigger traders who hold most investors at the mercy of the markets. It also removes the threat of being played by hedge funds, unscrupulous market makers, and institutional traders who would force you to buy shares more expensively than you would otherwise.
Let us explain the types of entry orders and the differences between limit orders (buy limit, sell limit) and stop orders (buy stop, sell stop).
Unlike market orders (orders to buy or sell immediately at the current price), entry orders (or entry limit orders) are pending orders entered in advance to enter or open a new position at some future price that the trader deems more favorable than the current price. These will execute automatically and don’t require any action from the trader at that time. This ability to choose entry points in advance is very valuable for two reasons:
Continue reading or play around in a risk-free forex demo account and test orders like sell limit, buy limit, sell stop and buy stop in real-time.
Buy Limit Definition – Buy Limit is an entry order to buy a currency pair at a future price below the current price, typically used by bargain hunters seeking to buy on a pullback from the current price at what they believe is at or near a level that has served as a ﬂoor or support in their chosen time frame, be it an hour, day, week, month, year, or longer. They are seeking to buy low and sell high. They’re comparable to value buyers in the stock market.
Buy Stop Definition – Buy Stop is an entry order to buy at a future price above the current price, typically used by traders who believe that once price breaks above a certain price level that has served as a ceiling or resistance level in the past, the price should continue a sustained move higher. Their goal is to buy as the price begins to make a sustained move higher. They’re comparable to momentum buyers.
Because currencies trade in pairs, you’re always long one currency and short another. When you sell or go short a currency pair, you’re buying the counter currency (the one on the right) and paying for it by selling the base currency. No restrictions exist against shorting a pair because selling and buying a currency pair is essentially the same type of transaction. Forex trading involves buying one half of the pair and selling the other to pay for it, regardless of the currency in which your account is denominated.
Sell Limit Definition – Sell Limit is an entry order to sell the pair short at a future price above the current price, typically used by bargain hunters seeking to go short a currency pair at what they believe is at or near a price level that has served as a ceiling or resistance in their chosen time frame. They believe that around this price level the currency pair will start to drop. They are hoping to sell high and buy low. As we learned earlier, really what they’re doing is trying to buy the counter currency at a lower price relative to the base currency, and then sell it for a proﬁt at a higher price relative to the base currency.
Sell Stop Definition – Sell Stop is an entry order to sell at a price below the current price, typically used by momentum-type short-sellers, those who believe that once the pair breaks below a price that has served as a ﬂoor or support in the past, the pair will make a sustained move lower.
Buy Stop Limit Definition– this type combines the two first types being a stop order for placing Buy Limit. As soon as the future Ask price reaches the stop-level indicated in the order (the Price field), a Buy Limit order will be placed at the level, specified in the Stop Limit price field. A stop level is set above the current Ask price, while Stop Limit price is set below the stop level.
Sell Stop Limit Definition – this type is a stop order for placing Sell Limit. As soon as the future Bid price reaches the stop-level indicated in the order (the Price field), a Sell Limit order will be placed at the level, specified in Stop Limit price field. A stop level is set below the current Bid price, while Stop Limit price is set above the stop level.
Limit orders (buy limit, sell limit) are almost always the better way to go, and not the stop orders (buy stop, sell stop).
By simply adding price to the order, a few things happen:
The risk is that your order may not be hit in fast-moving markets because the limit no longer applies.
So here are the Key Takeaways:
Obviously, we’ve just scratched the surface here – there are as many order types as there are ways to serve coffee at Starbucks.
We’ll cover those in due course, along with all sorts of variations including everything from the big three – market, limit, and stops – right up to those that may as well be an alien language – FOKs (fill or kill), IOCs (immediate or cancel), and GTCs (good till cancelled).
In the meantime, we want you to get in the habit of specifying price every time you place an order.
That way you’ll trade on your terms and, in doing so, dramatically increase your profit potential.
Exit Orders (stop loss and trailing stop or take profit) are detailed in our next article about fixed and trailing stop orders.
Understanding how entry orders (buy limit, sell limit, buy stop, sell stop) works is important, but if you want some help, MetaTrader 5 - MT5 download - offers 6 types of pending orders and our trainers can provide you the right guidance. Play around in a demo forex and notice how limit orders can make you serious money.
You can test automated strategies using different types of orders by creating an Expert Advisor in Robo-Advisor 007 (14 Days FREE Trial).