Tuesday, June 8, 2010

Four Main Types of Orders in the FOREX Market

There are many types of orders for traders to make transactions in the FOREX Market for making profits. Four main types are the most used, and many traders have found tremendous success with Market, Limit, Stop Loss, and Entry Orders.

Market Order

The most simple and most common type of order in the FOREX Market is the Market Order. Here, the trader buys and sells the currency at the rate prevailing in the market at the time of the transaction. Due to the huge size of the market and the high volatility, trends can reverse at any second. This is why traders prefer placing orders at the market price to guard them against any adverse trend.

Limit Order

With the Limit Order the trader specifies a price at which he may wish to buy or sell the currency. Suppose a trader has bought GBP against the USD at 1.9710, and then he can place a sell order at 1.9725. When the exchange executes the order, the trader will profit from it. The order will be cancelled if the target price is not achieved during the day.

Stop Loss Order

Due to market volatility, stop losses are essential. They determine the maximum loss a trader is willing to suffer. Suppose, in the above instance, the risk-taking ability of the trader is low. The trader may place a stop loss at 1.9705. At this level the exchange will book losses for him or her, and he or she won’t be affected if the price falls below 1.9705.

Entry Order

An Entry Order is filled only when certain conditions are met in the market, which the order specifies. There are two types of Entry Orders: Limit Entry and Stop Entry.

Here is an example of a Limit Entry Order. Let’s assume that the current market price for GBP/USD is 1.9705:10. This implies that the trader can transact at these levels. Here, a trader can place a limit entry order to sell his or her holdings at a price more than the market price, say, 1.9715. His or her order would be executed only if that price is attained. Similarly, he or she can place an order for buying at a level of, say 1.9700, and his or her ‘buy’ order would remain pending till the price falls to that level.

A Stop Entry Order is generally used when the trader has sufficient grounds to believe that the currency is trading in a fixed range and believes that it is on the verge of a breakout from that range. He or she might want to buy at a price higher than the market price or sell at a lower price than the market price. In the same example, the trader may go ahead and buy at 1.9720 or sell at 1.9690, where he believes that once these levels are attained, the currency will only go up or fall further, as the case may be. A trader exercises the stop entry order only when a trader has reasonable grounds to believe that there will be sharp movements in the currency rates in the Forex market.

So there you have the main types of orders in FOREX trading. Due to the risks in this market you should use caution and be guided by these types of orders.

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