At some point you will have to place an order with your dealer to make any
money in the currency market. Opening, closing, and managing trades are
accomplished through four different order types. Market orders, entry orders,
stop orders, and limit orders all serve a specific role in trading on the
forex market. The implementation of each order type is slightly different
among currency brokers. Ensure that you have a firm grasp on how to use
your dealer’s software before you trade with real money.
Market Orders
When you need to get in or out of a position quickly, the market order is
the right tool for the job. Market orders instruct your currency dealer to
execute a trade at the current bid or ask price. Execution of market orders
is nearly instant on most trading platforms, so a trader must be absolutely
sure he wants to enter the market before submitting a market order. Market
orders are not a guaranteed price, however, and your order may be filled
at another price if the market is moving quickly. Receiving a price at which
you did not intend to be filled is known as slippage, and though it is quite
rare under normal market conditions, it does happen.
If the market is moving quickly, the broker may quote a new price
to confirm whether the trader is still interested in filling the order at the
new price. This process of submitting an order only to be quoted a new
price over and over in a fast-moving market can be frustrating. Some currency
dealers offer a fill at best price option, which allows the trader to
choose a price range that’s acceptable to fill the order. Assume that you
would like to buy the EUR/USD at $1.4950, but the market price is changing
quickly. If you do not want your dealer to quote you again when the
price changes, you can specify a price range, allowing your dealer to fill the
order at any price within that range. In this case, if you specified a range of
10 pips, your market order could be executed anywhere between $1.4945
and $1.4955.
Entry Orders
Entry orders instruct your currency dealer to buy or sell a currency automatically
when the market reaches the price you have specified. The order
should be filled at the price specified or better, as long as the new price
favors your intended position. Entry orders are an important tool because
they allow you to place trades on your own time schedule and have them
execute automatically when you are not present. Figure 1.3 demonstrates
the use of an entry order to sell the EUR/USD along a line of resistance using
the hourly chart. Entry orders come in two flavors, depending on your
currency dealer’s technology.
Stop Orders
Limiting the amount of money lost when a trade goes bad is critical to
your long-term success. Stop orders are placed to automatically close a
trade that is not going your way. Stop orders are a form of entry order that
is executed at the price specified or at the best possible price once the
Figure 1.4 builds on the entry order example shown in Figure 1.3 by
illustrating where a stop order could have been placed. Managing risk and
using stop orders are discussed in detail in Chapter 4.
Limit Orders
Limit orders function in the opposite way of stop orders. Limit orders are
used to close a position at a profit once a specified price has been reached.
Limit orders are useful to preserve profit when a trader is unable to manage
a position in real time. Figure 1.5 completes our EUR/USD example by taking
profit with a limit order near the round number of $1.4700. Using a limit
order ensures that this trade will be closed at a profit, even if the trader
is unavailable when the market reaches her intended profit target. Many
trading strategies rely on limit orders to manage profits, although some
traders balk at the idea of cutting a winning trade short. The use of limit
orders and managing profit are discussed thoroughly in Chapter 5.