- Two kinds of orders: those to be executed now, those to be executed in the future (maybe)
- “Stopping out” of a trade
- Take profit order
- Trailing stop
- Limit order
- Other kinds of orders
Now that you know about pips and lots, it’s time to learn how to place an order.
Two kinds of orders: one to be executed now, one to be executed in the future (maybe)
When you place an order with a broker, there are two basic ways to place it: an order to trade at whatever the market price is right now, or an order to trade at some pre-determined level if the market price happens to get there.
The first one, an order to trade at whatever the market price is right now, is called a live trade, or an at-the-market order. An “at the market order” is fulfilled immediately at whatever price the market-maker is posting at that time.
On the other hand, an order placed at a specified rate will be filled whenever the market hits that level. Alimit orderis an order to enter a new position if the rate gets to a certain level. A stop-loss or take-profitorder is an instruction for the broker to close out an existing position when the currency rate reaches a certain level, either to limit one’s loss (in the former instance) or lock in a profit (in the latter).
“Stopping out” of a trade
To “stop out” of a trade means to close out the trade at a loss at a pre-determined level. That level is called the stop.
Traders can get stopped out in in two ways:
- As explained above, traders can set stop-loss orders at a certain level. This is an essential part of managing one’s risk in trading. For example, they might decide that they only want to risk losing a certain amount and will close out the position if that loss is hit. Or they may decide that if a currency pair goes through a certain level, then the trend has changed and their reason for being in the trade is no longer valid. In either case, when the market hits that level, the broker will automatically close out their positions. This saves the traders from even greater losses if the market continues to move in that direction.
- Traders often trade on margin. Margin is covered in another article, but briefly, it means that traders don’t up all the money necessary for their trades but only part of it, called margin, with the broker essentially lending them the rest. If the market moves against them, the broker may ask them to put more money into their accounts to cover potential losses. This is called a margin call. If they decide not to, or don’t have any more money to put up, then the broker will automatically close out their position on their behalf. This prevents the account from going into deficit.
Take profit order
A take profit order is similar to a stop loss, but in the opposite direction. It’s executed when the trade is making money. Traders may decide that they’re happy making a certain amount of profit on a trade, or they may estimate using technical analysis that the trend is likely to go just until a certain level has been reached, and decide that they want to close out their position there. They then leave an order with their brokerage firm to close out their position at that level.
A trader who enters into a position without a stop-loss order is like a tightrope walker without a net. You’re opening yourself up to lose everything you’ve put into the trade. On the other hand, you may think that it’s silly to put in a take-profit order ahead of time – why not just let the position stay as long as you’re making money? There are two trading adages that deal with that possibility: 1) No one ever went broke taking profits, and 2) pigs get slaughtered.
Trailing stop
There’s a variation on the stop-loss that allows you to take advantage of a move in the right direction, yet still limit your losses or lock in profits, as the case may be. A trailing stop-loss order is in effect a stop-loss order that follows your trade around and closes it out when the price has moved a certain amount from the highest level since you entered the trade. Trailing stops are set in terms of the number of pips, not levels.
This is pretty complicated to explain. It’s easier just to give an example:
Let’s say you went long EUR/USD at 1.1000. You might set a trailing stop of 50 pips. If EUR/USD simply goes straight down from the time you buy, you will be stopped out 50 pips below your entry level, in other words at 1.0950.
However, let’s say your analysis is correct and EUR/USD goes up to 1.1020. Your trailing stop would then trail along upward with the price. It would still be 50 pips, but now the stop would be 50 pips below 1.1020, in other words, 1.0970. (Of course, you can set a stop in the opposite direction – 50 pips above the entry point – if you go short a pair.)
The benefit of this kind of stop is that it allows you to ride the trend in one direction and then close out the position automatically when the trend reverses.
Not every trading platform offers trailing stops.
Limit order
Unlike stop-loss or take-profit orders, which close out positions at pre-determined levels, a limit order is one that opens up a new position at a specified level, usually more favorable than the current level. For example, let’s take EUR/USD trading at 1.1000 again. You may think that it’s likely to decline for now, but not much further than 1.0950 is . You could then put in a limit order to buy at 1.0960, hoping that you get filled at near the bottom of the range.
Other orders
There are other kinds of orders that combine these ones, such as “one cancels the other” orders and “contingent orders,” but they’re for more advanced traders. Let’s leave it at this.
Summary
We’ve discussed the main kinds of orders that you can submit to your brokers. These boil down to two kinds: those to be executed now at the current rate and those to be executed in the future if the market hits a certain level. The latter includes stop-loss orders and take profit orders to get you out of trades, and limit orders to get you into trades.
