What are the Different Types of FOREX Orders?

An order is an instruction with defined parameters to your broker to take a specific action in the market, either now or in the future. An order is for immediate execution or pending execution. Pending means prices must behave in some specific way before the order is ready for immediate execution. A market order is for immediate execution, at the best bid or ask the broker can offer to you as a function of the broker's data feed and liquidity providers.

The number and types of currency trading orders that can be used with broker-dealers have expanded substantially in the past few years.

Customer demand for more flexibility and trade execution options and competition have been the main driving forces. Broker-dealers, especially market makers, are happy to oblige, since a large palette of orders helps them manage their book.

Orders can be further broken down into three primary categories of functionality -- 1) market (immediate execution), 2) limit (pending execution), and 3) stop (pending execution). See Table below. All broker-dealers offer the basic three, and some brokers have unique in-house specialty orders. Because orders can be classified according to different criteria, they are cross-category. Some orders are not mutually exclusive and can be combined.

Common Broker-Dealer FOREX Orders

FOREX Order TypesCombined
LimitYes, with Stop
StopYes, with Limit
CombinationVaries from Broker to Broker
SpecialtyVaries from Broker to Broker

All of the three basic orders and modulations thereof can be used to either enter or exit a trade, or both.

Tip: You exit a trade by closing it, not by initiating the opposite order! If you attempt to enter an offsetting transaction on a U.S. broker trading platform, the order will be rejected, based on the NFA's anti-hedging regulations.

NFA Compliance Rule 2-43 now prohibits hedging orders -- simultaneous orders to buy and sell. If your trading method requires hedging, you may still find a foreign broker to accommodate your needs but even that is getting dicey. Hedging is quite useful to many system traders. It seems odd one would want to buy and sell at the same time. But many systems trade at multiple time frames simultaneously and may in fact be long at one time frame, short at another. Grid systems, a popular method of trading today, requires hedging.

The trader's guiding rule of orders should be to keep it simple. Do not use an order simply because it looks fun or interesting. Your trading method should be your primary guide to selecting an order arsenal. Complex orders distract from the primary job of watching and analyzing the markets, are difficult to execute, and increase the chances for error.

Tip: In many years of trading currencies, I have never found the need for trading orders beyond Market, Stop, and Limit.

Most broker-dealers delineate the various orders they accept in their trading platform documentation; please look there before e-mailing them. Order functionality is typically integrated into the trading platform, but some of them can still be difficult to execute. You can google "FOREX orders" and variations to find some listings of broker-dealer websites, FOREX portals, and learning websites.

Figure below shows the Order Palette for MetaTrader 4.

[caption id="attachment_13050" align="aligncenter" width="550"]MetaTrader 4 Order Palette MetaTrader 4 Order Palette[/caption]

The exact definitions of many orders may vary slightly from broker to broker. Be sure you know your broker's terms before making any order.

Market Orders

A market order is an order to buy or sell at the market price. The buy may be to initiate a new position or liquidate a previous sell position. The sell may be to initiate a new position or liquidate a previous buy position. A market order may not be at the current price because, like a river, prices are always flowing: sometimes slow, sometimes fast. Most market makers show you the price you will receive before you execute the order. In requoting, you do not get that price. Large orders and slow, fast, and illiquid (thin) markets may affect the price you receive on a market order.

A buy adds to aggregate demand and pushes prices up, if only slightly; a sell adds to aggregate supply and has the opposite effect. The bid-ask spread in FOREX reflects this, as well as protecting your broker and helping him maintain an orderly book -- and make a fair profit by serving you.

Limit Orders

A limit order specifies a specific price to execute your order. It may also specify duration, how long you wish to keep the order active. If the price is touched within the specified duration, your order becomes a market order.

With a limit order, you endeavor to receive a better price than the current market price -- lower if you are buying, higher if you are selling. See Figure below.

[caption id="attachment_13051" align="aligncenter" width="550"]Limit Orders Limit Orders[/caption]

Tip: Use market orders in normal markets; use limit orders for large orders and in fast, slow, and thin markets. A market order in a fast market, such as immediately after the release of a news item, can be a disaster.

Be sure to keep track of all open orders you have in every market. They are your responsibility, not the broker's.

Tip: You never want to chase a trade, at least for an entry! If you miss because the order did not execute, do not keep raising or lowering your order, hoping to catch it; wait for it to come back into your accepted range.

Stop Orders

A stop order is essentially the opposite of a limit order. Your order executes as the market moves in a given direction at a specified price. You may use a stop order to confirm the market is trending as you expected before entering. More critically, you use a stop order to contain the amount of risk and loss for any trade. This is called a stop-loss order. See Figure below.

[caption id="attachment_13052" align="aligncenter" width="550"]Stop Orders Stop Orders[/caption]

An automatic trailing stop is offered by several broker-dealers. This raises or lowers your stop by a fixed value as the market goes in your position, thus protecting some of your profits. You can, of course, mechanically apply trailing stops. They are great in theory, not quite so great in practice. They work better with some trading methods than with others. I find automatic trailing stops are too mechanical.

A major debate has raged for years in both futures and FOREX as to whether traders should use stop-loss orders in the market or simply keep them to themselves -- mental stops -- and wait for the market to reach that price and then use a market order. Many traders believe brokers use stops entered in the market to balance their books. Brokers are occasionally accused of running or harvesting stops -- moving their data feed specifically to execute the stop order. This does happen; how often is difficult to say.

Tip: This is a big one. Beginners should always use stop-loss orders to protect an open position. Once you have some experience in the market -- and only if you have good discipline -- then keep mental stops. It is easy to ignore a mental stop and hope the market will turn back in your favor -- and it usually does not. Yes, by using stops, the broker can see your order; and, yes, stops may be harvested; and, yes, stop fills -- especially without limits -- may be poor. But we still recommend that the new trader use them.

Confusion and panic may result from using mental stop-loss orders or moving them around to prevent them from being hit. Confusion and panic are your worst enemies in trading and will invariably lead to another mistake. In a fast paced, leveraged market such as FOREX, the first mistake is often survivable; the second mistake may not be so easy on you.

Tip: Never move an order further away from the market than it was initially placed! Only move it in the direction of the trade as the trade works for you.

Tip: Never leave an open position unattended without a stop-loss. I still remember an incident from when I was a young commodities trader and watched the markets from the local Peavey office. Soybeans were limit up with a profit of $1,000. I left to get a cup of coffee from the cantina, returning in less than five minutes to see the market was limit down -- a $1,000 loss.

Tip: As long as we are talking about nevers: never add to a losing position.

You may have difficulty getting comfortable with stops and limits. They are essentially mirror images of each other. See Figure below.

[caption id="attachment_13053" align="aligncenter" width="550"]Stop and Limit Orders Stop and Limit Orders[/caption]

A stop order is at a worse price than the current price. Lower, if sell stop for a sell, higher, if buy stop for a buy. A limit order is at a better price than the current price. Higher, if sell limit for a sell, lower, if buy limit for a buy.

There is also a stop-limit order. You specify a price and also a maximum range beyond that price for which the order can be executed. The advantage of a stop-limit order is that you will get the price you want if that price is reached. The disadvantage is that if prices do not trade in your specified range, your order remains unexecuted. In a fast market, a stop-limit order may be a complete waste of effort; it simply will not be executed. This is not uncommon in either market immediately after a news release or in thin pairs when a large transaction is entered.

Combination Orders

Many orders are not mutually exclusive and can, if the broker permits it, be combined. A common one is a one cancels the other (OCO) order. The execution of one order automatically cancels the other. You might enter both a buy and sell order in a market awaiting a breakout from a narrow trading range. If either is executed, it cancels the other.

Specialty Orders

There are perhaps a dozen or more specialty orders; the beginner is advised to stay away from them. A few brokers offer orders unique to their trading platforms. Time triggers specify a time when an order should become active and for how long. A box-top is a market order that automatically changes to a limit order if it is not executed at the market price right away. Limit on close (LOC) and limit on open (LOO) are executed at the closing price or the limit price if that price is equal to or better than a specified limit price.

The FOREX forums are a good place to find out how traders use specialty stops as well as the pros and cons. New traders should avoid these modulations.

Order Placement

Order placement will vary from broker to broker, depending on how their trading platform is organized. As of 2012, placing an order is a simple and pleasant experience. Your trading platform really does all the calculation for you. Traders can typically see the various parameters of their orders before executing -- leverage, margins, pips to dollars (if the dollar is your account-denominated currency), and other pertinent information.

Practice with a broker's order placement system first on a demo account. When you open a mini- or micro-account, practice again with minimum lots just to make sure you have this mission-critical operation down cold.

When you enter a market order for immediate execution you must specify three pieces of information: (1) the currency pair, (2) buying or selling, and (3) the quantity. If it is a pending order such as a stop or limit, you must also (4) specify how long it will remain in the market. I strongly recommend that the new trader get into the habit of entering both a stop-loss and a take-profit order with every market order. Once a pending order has been filled, then enter a stop-loss and take-profit immediately.

Tip: Practice all the types of orders you intend to use on a demo account until they are second nature to you. Each time you sit down to work with the demo, practice a few orders as your first task. Begin with simple market orders, add stop-loss and take-profit orders, then move on to pending orders. Place stop-loss (S/L) and take-profit (T/P) orders fairly close to your entry and use a five-minute chart for practice. In this manner, you can watch and see the order executed.

But be careful not to place them too close to the market price! Brokers will often reject such orders. Market volatility makes it possible that the order cannot make the queue before prices reach that point. Twenty to 25 pips away from the market for S/Ls and T/Ps is adequate. This varies from broker to broker. Pending a news announcement, orders placed very close to the market price will be rejected by almost all brokers.

Order Execution

Traders using an online trading platform click on the Buy or Sell button after having specified the underlying currency pair, the desired number of units to trade, the price, and the order type. The execution of the order is almost always instantaneous. This means that the price seen at the exact time of the click will be given to the customer. If you leave the order palette or window open too long and prices change you will receive a requote when you actually pull the trigger.

It is still possible with a few brokers to place an order by phone in an emergency situation, but this method is almost unheard of today as a standard practice. Many brokers will no longer accept telephone orders. If they do, be sure to have all your identification information at the ready. If they do not, you may enter a counter trade in the same amount on your backup broker's platform. Not pretty, but it will serve the purpose in an emergency.

Tip: In any emergency -- do not panic! The first error is almost always correctable. The second error, made because the trader panicked after the first one, may not be reversed so easily.

Order Confirmation

Online traders receive a screen message indicating confirmation of an order within seconds after the trade has been accepted and executed, as shown in Figure below. The trade will also show up on the platform's Open Positions page.

[caption id="attachment_13054" align="aligncenter" width="550"]Order Confirmation Screen Order Confirmation Screen[/caption]

Traders can also cancel or modify an order that has not been executed at any time. The exception is a fast market or an instance when your order is on the verge of execution. In such cases, the system simply cannot queue your order in time.

Open Orders

Your broker's trading platform will also inform you of your transaction exposure and details. In MetaTrader 4, this information is in the Terminal window. See Figure below.

[caption id="attachment_13055" align="aligncenter" width="550"]MetaTrader 4 Terminal Window MetaTrader 4 Terminal Window[/caption]

Once your trade is executed, it will show on your broker's Open Trades page. When the trade is closed and complete, a summary will show on the Account Summary page. As far as the order and accounting information you require is concerned, almost all brokers have this down pat on their platforms. One of the purposes of the demo account is allowing you to become second nature comfortable with how it all works and ties together.

Tip: Before executing an order, review all aspects of the order one last time before clicking Submit. The two most common order entry errors are selecting Buy instead of Sell (especially to offset an order) and entering the incorrect number of units. Note what values are preset (if any) on your broker's trading platform. Prices are quoted as either to four or five decimals of accuracy.

Remember, to offset an order, it must be for the identical currency pair and number of units. Both Buy and Sell are offset with a Close Trade. If you attempt to Sell to liquidate a long or Buy to liquidate a short, you will receive an error message on a U.S.-domiciled trading platform and simply have two trades in opposite directions (a hedge) opened on most foreign trading platforms.

If you buy a 50,000 lot and then another 50,000 lot, when you liquidate, the first 50,000 lot -- on a U.S. account -- will automatically be the one closed because of FIFO regulations. Of course, you can also liquidate them as a single 100,000 lot.

Open a Demo Account

I suggest you open one demo account at this time, if you have not already done so. You will want to test drive others later. If you wish to begin with a broker and platform good for your entire trading career, I recommend www.atcbrokers.com
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2020. Content published with author's permission.

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