Types of orders in Forex trading and their features

One of the first things new traders should learn is how to use the different order types. The exact number of orders available to you often depends on which broker you choose to use. There are about ten different order types that can be used.

Selecting the wrong order type or failing to open the required order can easily result in significant losses. Some orders are designed to help a trader make losses or profits, others are designed to protect profits, and others are used to implement more complex trading strategies.

Learning how to properly use the different order types is part of a comprehensive trading education.

The most popular types of forex orders

The following sections will describe the mechanics of the most commonly used order types. Traders should understand how each of these orders can be used using their trading platform.

In addition, each order type has some specific features that the trader should become familiar with. This will help determine the most appropriate use of the desired order type in the trading process.

Market orders

A market order is perhaps the simplest and most common type of order. It is usually executed immediately by the broker unless it is received in too large a size or was placed in fast moving markets.

As the name suggests, market orders involve buying or selling a currency pair at the current market rate. Market orders can be used by a trader for long or short positions. They can also be used to close current positions by buying or selling.

One of the main advantages of market orders is that they are almost always executed. The downside to using market orders is that you may get an unexpectedly unfavorable price if the market moves quickly against your position.

Limit orders

Whenever a trader wants to specify a lower or higher price at which an order should be executed, this type of order is called a limit order. Limit orders can be used to stop losses as well as take profits.

The name of this order type comes from the fact that the trader has requested that transactions entered into on his behalf be limited to transactions executed at the specified exchange rate or better.

In practice, however, limit orders are usually executed at the specified price, although the broker may offer a better order execution speed to impress a particularly good client.

Some traders like to use a certain type of limit order called a Fill or Kill or FOK order. The first order type, FOK, instructs the broker to either fully fill the order at a specific price or cancel it. The second type of FOK order instructs the broker to immediately fill all orders at a specified price and then cancel all others. This last type of Fill or Kill order is most often used when trading large amounts.

Take profit orders

A take profit order is one of the most common types of limit orders. As the name suggests, it is typically used by a trader wishing to liquidate an existing position at a profit. Therefore, the price level specified in the take profit order must be better than the prevailing market rate.

If the trader's initial position is short, the take profit order will involve buying back that short position at a price below the prevailing market price. Conversely, if they were long the take profit order, it would be liquidated if the market moved up.

Traders may sometimes specify that their take profit orders are All or Nothing or AON. This means that the order must either be fully executed or not executed at all. AONs are used to prevent partial execution of orders, which may be considered undesirable.

Alternatively, traders can choose to partially fill a smaller amount than the entire take profit order amount. This can be useful if the broker trying to fill the order can only fill part of the order at the exchange rate specified in the order.

Stop loss orders

A stop loss order is another very common type of order, usually used to liquidate an existing position. Such orders are typically executed as market orders once the stop loss level is triggered when trading a currency at that level.

Essentially, when the market has moved against an existing position to a point and the exchange rate has reached the specified stop loss level, the stop loss order is executed and causes the trader to incur a loss.

However, a stop loss order limits the trader's further losses if the price continues to move in the same unfavorable direction. This makes stop loss orders an important part of risk management strategies for many traders.

Trailing stop orders

Once profits start to rise and profits begin to accumulate, traders usually want to protect part of their position. In this situation, trailing stop orders are often used, which follow the price.

A trailing stop is often placed in a way that locks in profits while still allowing profits to continue to run. If the position's profits increase, the trailing stop is then moved closer to the price to ensure that more profits are preserved in the event of a pullback or reversal.

Good Til Canceled (GTC)

A Good Til Canceled order means that the order will be held in the market and will be executed until the trader who placed the GTC order cancels it. Most limit orders placed in the spot forex market are usually referred to as Good Til Canceled or GTC orders, so this designation is rarely used in practice among most traders.

However, traders dealing in financial instruments that are traded on a centralized exchange, such as currency futures, may need to indicate that the order they are entering is Good Til Canceled. This is because the order may otherwise be marked as a day order and automatically become invalid if it remains unexecuted at the end of the current trading session.

Good for the Day

A Good for the Day order, also known as a Day Order, is not used very often in the forex market as currencies are traded 24 hours a day from Sunday to Friday New York time.

Day orders are more often used in centralized markets such as stock markets, where each trading day ends at a specific time and then resumes on the next trading day. In addition, the Good for Day order can be used by currency traders operating the Chicago International Monetary Market futures exchange and its electronic platforms that have a fixed trading day.

However, some traders operating in the over-the-counter market or through online brokers may specify an order cancellation time to open a new position that corresponds to the end of their business day. This may be especially preferable if they are day traders and therefore do not want to hold the position overnight.

One Cancel the Other (OCO)

One Cancel the Other order generally means that the trader enters two orders at the same time, and the execution of one order will require the cancellation of the other. An example of this situation would be if a trader enters a position and then simultaneously enters both a take profit and a protective stop loss.

For example, most traders would like to prevent a situation where an existing position may be closed at the take profit level, but a new position may then be initiated if the market returns to the price at the stop loss level before the order is canceled.

In this case, the trader can specify that either of the two orders should be canceled if the other order is filled by entering the One Cancel the Other order when they place their stop loss and take profit.

One Trigger the Other

One Trigger the Other will generally be used if a trader wants to enter an order as soon as another order is filled. For example, a trader may place a limit order on the market because he wants to enter a position at a certain price level.

If this limit order is subsequently filled, the trader may wish to set a protective stop loss and take profit. When faced with a scenario like this, a trader can set up their initial limit order to potentially enter the desired position if it is executed along with the price movement.

Using a One Trigger the Other order allows you to indicate to your broker that these last two orders should not be placed on the market until the initial limit order is executed. If this initial limit order is filled, it will result in the desired stop loss and take profit being entered.

Order slippage

The difference between the market price and the order execution price is often called slippage.

Order slippage tends to increase when the market moves quickly and liquidity declines below normal levels, which is often seen immediately after major economic news, monetary policy announcements, or other important news that may affect financial markets.

Many retail traders will check their broker for slippage on orders executed in fast markets as an indicator of service quality. Knowing this, some brokers even guarantee order execution levels for their clients, thereby effectively reducing slippage as much as possible.

Additionally, traders using backtesting techniques to determine and compare the profitability potential of multiple trading strategies should always plan for the possibility of slippage if they intend to use market orders or stop losses to enter and exit their positions.

To avoid poor market order execution performance due to slippage, a cautious trader operating in a fast market may sometimes decide to use a limit order instead of a market order. This may expose them to the risk of failure to execute the order, so they may set a cap on their order at a price that is below the market price to be reasonably confident of execution. This allows them to specify a price below which they do not want to sell, or a price above which they do not want to buy, and thus control slippage to some extent.

Limit orders are often used by professional traders and financial institutions when they are making a large transaction against a budgeted exchange rate or when they want to avoid poor execution levels on market orders when the exchange rate is changing rapidly.

Entering a market order in MetaTrader

Now that we have discussed the most common types of forex orders, it seems appropriate to discuss how to practically enter a market order, a stop loss order and a take profit order simultaneously into a trading platform. In this example, we will use the popular electronic trading platform MetaTrader, which remains the standard for currency traders working through online brokers.

The image shows a pop-up trading screen in MetaTrader 4 of a potential transaction to buy the EURUSD currency pair with a position size of one lot. The current market quote is shown in the image as bid 1.10825 and bid 1.10839. Additionally, the trader specified in his trading plan to enter a stop loss order level at 1.09990 and a take profit order level at 1.12850. Please note this warning draws attention to the fact that the actual exercise price may differ significantly from the price shown.