If you are an active trader that risks capital in the markets, you need to learn how to use the tools available to avoid potentially steep losses and to buy or sell a currency pair at attractive prices.
For this, you have three types of orders at your disposal: a Market Order, a Limit Order, and a Stop Order. What follows is a description of these three basic order types available in Forex trading.
Market Order – this is the most common order type. It is executed at the best possible price obtainable at the time the order is sent. It’s called a market order because it’s an order to buy or sell shares at the prevailing market price. Since this type of order does not specify a price, the order is executed immediately.
Limit Order – an order to buy or sell at a designated price. It typically represents an order that opens a position at more favorable levels than the current market price. If the limit order is to buy, it must be entered at a price below the current market price. If the limit order is to sell, it must be placed at a price higher than the current market price.
Stop Order – there are two types of Stop Orders:
- Protective stop order (Stop – Loss) – used to limit the loss on an open trading position.; it instantly closes a trade when the market moves a specified amount against you. These are critical to trading survival.
- Stop order to enter into the market – typically used for trading breakouts. For example, if you think a rising EUR/USD will continue to rally further, you would place a Buy stop order above the current price. It will only be executed when the price rises above the stop price. Vice-versa in the case of sell stops. Stop Orders turn into Market Orders when the market trades at that price.
Keep in mind: Stop Orders as well as Market Orders are subject to slippage, while Limit Orders are not.
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