Many new traders sit in front of a trading platform for the first time and don’t really know how to place an order. Unfortunately, many new traders don’t even have enough of a foundation of understanding to be able to ask what they need to know. While most trading platforms are different, there are many similarities. One similarity is the different types of orders and when to use them. Let’s take a look at the three most popular:
[B]Market Order -[/B] A buy or sell order in which the trader wants to execute the order at the best price currently available. Also known as “at the market”. If you can buy the EUR/USD at 1.4800 and sell the EUR/USD at 1.4798, those are the market prices with a two pip spread. If you buy “at the market”, you would be filled at 1.4800 and if you sell “at the market”, you would be filled at 1.4798.
[B]Stop Order – [/B]There are two types of stop orders. The first is a protective stop order to close a trade when the market moves a specified amount against your position. If you bought the EUR/USD at 1.4800 and wanted to limit your risk to 50 pips, you would place your protective sell stop 50 pips below your entry or at the 1.4750 level. If you sold the EUR/USD at 1.4798 and wanted to limit your risk to 50 pips, you would place your protective buy stop 50 pips above your entry or at the 1.4848 level. You can also use a stop order to enter into the market. These orders can be used for trading breakouts. If you thought the EUR/USD would rally further after a move above the 1.4900 level, you would place a buy stop for entry at 1.4901. As the market printed 1.4901, your buy stop would become a market order and be filled at the next best price available. If you thought that the EUR/USD would continue moving down if it traded down through the 1.4700 level, you would place your sell stop for entry at the 1.4699 level. As the market printed 1.4699, your sell stop would become a market order and be filled at the next best price available.
[B]Limit Order - [/B] There are two types of limit orders. The first is a limit order to close a trade when the market moves a specified amount to the advantage of your position. If you bought the EUR/USD at 1.4800 and wanted to exit when your trade showed a profit of 100 pips, you would place your sell limit order 100 pips above your entry or at the 1.4900 level. If you sold the EUR/USD at 1.4798 and wanted to exit when your trade showed a profit of 100 pips, you would place your buy limit order 100 pips below your entry or at the 1.4698 level. You can also use a limit entry order in an attempt to get a better entry price. If the EUR/USD is trading at 1.4800 and you thought it would trade down to 1.4750 before rallying, you would place your limit order to buy at 1.4750. If the EUR/USD is trading at the 1.4798 level and you thought it would rally up to 1.4850 before selling off, you would place your limit order to sell 1.4850. When using a limit order, you will only be filled at the price you designated or better.
To sum up:
Market Order – you are buying or selling at the current market price.
Stop Order – a buy stop order is placed above where the market is currently trading and a sell stop order is placed below where the market is currently trading.
Limit Order – a limit order to buy is placed below where the market is currently trading while a limit order to sell is place above where the market is currently trading.
Good luck with your trading!
[B]Written By Thomas Long, FX Power Course Instructor[/B]