Advanced Order Types Put Forex Trading On Auto-pilot
Sophisticated brokerages offer advanced order types in their trading platform. These orders are critical to risk management in the fast moving, 24-hour Forex market although they may also be available in some stock brokerage trading platforms. Although they are very much taken for granted by seasoned traders, individuals who have just encountered them can be at a loss.
This article will discuss commonly encountered advanced orders, and subsequently, teach traders how to use them to power up their trading.
The market order is one that most if not all of us are familiar with. When we enter to buy or sell a position at the best available current price, we are in fact entering at market order. It is the opposite of the limit order which we will cover shortly.
Market orders are executed manually.
A limit order is an order placed to buy or sell a position at a specific price or better. It is very much like an automated queue and has a fire-and-forget nature. That means the trader can log off the system and move on to other tasks while the order stays active.
Limit orders are used when traders want to buy or sell a position at a desired price but do not have the luxury to wait. He or she trader may have to wait for some time for the price level to be reached. For the 24-hour forex market, desired price levels may be reached only during sleeping hours. For traders who have a full time career, those hours could also mean working hours in the daytime.
The limit order can be used to open a new position or exit an existing position. A buy limit creates a new long position or closes an existing short position. A sell limit creates a new short position or closes an existing long position.
Limit orders work in conjunction with time limits. This mean that limit orders can be set with an effective duration. After the effective duration has lapsed, the order will be cancelled by the system automatically. In contrast, limit orders can also be good-till-canceled or GTC. Traders must log into the system and cancel the order manually.
The stop order or stop-loss order is associated with an open position. For a busy trader who does not have the luxury to watch the market constantly, an open position poses risk. It is especially so with leveraged instruments such as forex futures and commodities. The stop order can be utilized to cap the maximum loss.
The order can be placed at a desired distance from the price where the position was opened. This distance represents the maximum loss that the trader is willing to tolerate.
