There are only three basic order types: Market Orders, Stop Orders and Limit Orders. Every other order type which you may encounter is developed from these basic order types. A Stop-Loss Order, for example, is simply a Stop Order applied to a particular purpose.
There is a whole menu of complex order types out there; but, every one of them falls into one of the following categories:
• Combinations of basic order types (for example, Stop-Limit Orders)
• Derivatives of basic order types (a Stop-Loss Order is a Stop Order, named so as to identify its special function; and a Trailing Stop is a derivative form of Stop-Loss Order)
• Alternate terminology adopted by various brokers (for example, FXCM uses the term Entry Order, but MBTrading does not; an Entry Order is nothing more than FXCM’s term for either a Stop Order, or a Limit Order, used to ENTER a trade)
If you learn everything you need to know about the three basic order types, learning the complex order types will be easy. Here are the main things you need to know about the basic order types:
• Market Order. This order tells your broker to execute (buy or sell, as the case may be) your order as soon as he receives it, at the current market price, without other conditions or stipulations. Because of the liquidity of the forex market, it is virtually guaranteed that your market order will be executed immediately; the price at which it is executed is NOT guaranteed. A Market Order is the simplest type of order.
• Stop Order. This order tells your broker to buy (or sell) at a specified price which is different from the current market price. A Stop Order will take one of two forms:
(a) Buy Stop Order - placed ABOVE the current market price, and used to either enter a long position, or exit a short position (in which case it is a Stop-Loss Order)
(b) Sell Stop Order - placed BELOW the current market price, and used to either enter a short position, or exit a long position (in which case it is a Stop-Loss Order)
There is no guarantee that a Stop Order will be executed; but, if it is executed, you have a reasonable expectation that it will be executed at the price you have specified, plus or minus “slippage”.
• Limit Order. This order tells your broker to buy (or sell) at a specified price which is different from the current market price, OR BETTER (meaning HIGHER if you are selling, or LOWER if you are buying). A Limit Order will take one of two forms:
(a) Buy Limit Order - placed BELOW the current market price, and used to either enter a long position, or exit a short position (in which case it is a Take-Profit Order)
(b) Sell Limit Order - placed ABOVE the current market price, and used to either enter a short position, or exit a long position (in which case it is a Take-Profit Order)
There is no quarantee that a Limit Order will be filled; but, if it is filled, you have a reasonable expectation that it will be filled at the price you have specified, or better.
Notice that a Buy Stop Order used to exit a short position is, by definition, a Stop-Loss Order; and a Sell Stop Order used to exit a long position is, by definition, a Stop-Loss Order. This probably explains where the term “stop-loss” came from. Many traders prefer the term “protective stop” instead of “stop-loss”; it’s more accurate, in one sense, because it includes the idea of protecting a portion of your profit, as well as protecting you from a worsening loss.
Notice also that a Take-Profit Order is either a Buy Limit Order or a Sell Limit Order, depending on whether you are long or short — which explains why traders typically refer to a Take-Profit Order simply as a limit.
If the description of Stop Orders and Limit Orders given above seems complicated — well, it is. Especially the requirement that Buy Stop and Sell Limit orders be placed ABOVE the current price, and that Sell Stop and Buy Limit orders be placed BELOW the current price. This is a concept you should study, until you thoroughly understand it. You simply need to make it part of your basic forex knowledge — like knowing that you buy at the ASK price, and you sell at the BID price. Until those things are made permanent in your mind, you’ll be confused and frustrated.
Here’s a table that I made and posted to another forum several years ago, which shows graphically what we have been talking about:
Suppose the current price of a particular currency pair is 1.5000. The table shows:
• 5 types of orders — buy limit, buy stop, sell limit, sell stop, and market order
• whether each order type would be placed above, at, or below the current price, and
• what function each order type would perform
Finally, maybe this post — http://forums.babypips.com/newbie-island/38331-what-order-type-use.html#post248252 — will shed some further light on this subject for you.
I hope that helps you.
. I’d just put in Limit Entry Order, tell to go short once the price hits a certain high and do the same if the price goes below a certain low.
