In the first instalment of this article series, (click here for Forex Online Guide – Part 1 to read if you missed it), we introduced you to the types of orders when it comes to foreign exchange trading. Just for the sake of a quick recap, the types of orders are: Good Till Cancelled (GTC) Oder, Day Order, Market Order, Limit Order, Stop Order, OCO Order, If Done Order, and Loop Order.
When you place an order, you need to specify how long the order should be valid for. This is where Good Till Cancelled (GTC) and Day Order come in. That is, each order you place fall under either of this two types: with GTC, your order will run continuously until you cancel it while day order will cancel itself at the end of each trading day. Now back to the main purpose of this part of the article.
In this part, we will highlight how the other orders work using very basic examples that should be easily understood. They are:
Market Order: When a foreign exchange trader places a market order, he/ she is doing so to purchase currencies at the currently available prices – known as current spots. For example, if the current spot for EUR/USD is 1.06730 and you place a market order, this is the price you’ll get for it at that moment.
Limit Order: With this, you are giving an instruction to deal if a market moves to a favourable level. This sort of order is often used to take profit on an existing position but can also be used to establish a new one. For example, EUR/ USD is trading at 1.0690/94 and you believe the euro will get stronger while the EUR/USD will fall back to below 1.0650 before it goes any higher. Then you put a Limit Order to buy EUR/USD 1’000’000 at 1.0650. Your Limit Order will be executed only when EUR/USD is offered at 1.0650.
Stop Order: Is an instruction to deal if the market moves to a less favourable position. For example, if you bought a long USD/JPY position at 120.65 and you want to prevent loss should the value of USD/JPY starts to fall, what you need to do is to place a Stop Order to sell USD/JPY at say 120.0. This will close your position with a 50-pip lose.
One Cancels the Other (OCO) Order: Is a special type of order where a stop order and a limit order in the same market are linked together. With an OCO order, the execution of one of the two linked orders results in an automatic cancellation of the other.
If Done Order: This type of order is a two-part order, in which the execution of one part occurs only when the order has been completed. Here, the first part (which is only a Limit) is created in an active state while the second (can be either a Stop, a Limit, or and OCO) is created in a dormant state. When the desired price is reached for part 1, it will be activated and the second will then be activated.
Loop Order: Has to do with repeating a certain order in the hope that a cyclical movement in the market would result in profit. Like the OCO, it is a pair of orders (except in this case they are matching orders) where the first part is active and the other dormant. When the desired price is reached by the dormant order, it will be executed thereby causing the second to become active and a new order is setup in a dormant state. This process repeats itself until explicitly cancelled; hence the name Loop Order.
For a beginner, understanding each of these orders and knowing exactly when to place them can be somewhat challenging. However, with a bit of practice and time, you should be able to master it with ease to maximise profit.