Lesson 5 - Types of Trading Orders

A lot of newcomers imagine that trading in Forex means sitting in front of their computer 24/7, observing the opened trades and following changes in exchange rates. This indeed sounds exhausting, but luckily it is not mandatory to do so.

Using orders can ensure that your trading does not suffer if you are away from the screen. The function of orders is to commit a broker to take action—to fix our losses or profit at a certain amount, to sell or buy currency—when the price reaches a particular level determined by you in the order.

Let’s get to know the Stop-Loss and Take-Profit orders.

Let’s say we open a 0,1-lot-size GBP/USD Buy trade when the price is 1.5500. We determine that our maximum loss of this trade is 100 USD. (Or 100 pips; when the lot size is 0,1, 1 pips is equal to $1.)

If the price goes down to 1.5400, our loss will be 100 points or 100 USD. When the price reaches this level we must close the position; however, we don’t want to to sit in front of our computer and wait. Therefore, we place a “Stop Loss” (SL) order with our broker, so that he can close the trade when the price reaches 1.5400. Of course, we would prefer not to lose any money at all, but the SL ensures that we avoid further losses, should the price drop any further.

The SL order is directly related to a trader’s discipline, as it limits losses. You need to pay close attention here: before opening a trade, we should clearly know how much we are willing to lose in the given trade, and we should place an SL order to avoid losing a big chunk of our deposit. Read this post to learn how Forex trading without SL orders can end.

Similar principles are en play when fixing a profit. We do not accurately know when the price is going to change by 100 points in our favor (resulting in a profit)—it could occur in the very early morning when we are still sleeping. Therefore, when we wish to fix a profit we will use a “Take profit” (TP) order, which will trigger when a price reaches the pre-determined profit zone. In this way, we don’t have to worry about losing our profit even if the price is going to decrease. As soon as the price reaches the pre-determined level, our broker will fix our trade. The risk of a TP is that we may miss out on further profits should the price keep increasing.

You can change or cancel a placed order to meet the present market situation and your trading strategy. For example, let’s say you bought EUR/USD and placed SL and TP orders. The price went up but didn’t reach your TP price point before going back down again. In this situation, you can change the SL order to take effect at the break-even point, i.e. at the price point where you entered the market. In this way, you save yourself from possible losses if the price decreases any further. You can also change your TP order if you think that you can reach a higher profit (i.e., if you think the price will increase beyond the TP limit).

Sometimes, it is unprofitable to open a trade, and it is better to wait until the price reaches a certain level before opening a trade. Pending orders can be used in this situation.

There are four types of pending orders: Buy Stop, Sell Stop, Buy Limit, and Sell Limit.

Please read the following post:

• Forex trading without Stop-Loss—a Ticking Time Bomb

Exercises

1. Open an EUR/USD Buy trade. Place a Stop Loss (SL) order to take effect 30 points below the price at which you entered the market, and a Take Profit (TP) order 60 points above the entrance price. Wait until your order is active and keep an eye on the market. Analyze the result.

2. Place an EUR/USD Sell Limit pending order, 50 points higher than the entrance price. Place an SL order 50 points below entrance price and a TP 100 points above. Analyze the result when one of the orders is being triggered.

3. Place two GBP/USD pending orders—a Buy Stop and a Sell Stop—10 points higher than the present price. Place an SL at 30 points of both orders and a TP at 50 points. Analyze the result when one of the orders is triggered.

I wish you success!

Do you have any questions? Please write your questions in the comments section—we will do our best to solve them with you!