Placing Orders

In Forex trading, when you buy one currency, you need to sell another currency in exchange. If you anticipate that the price of the base currency will go up in comparison with the counter currency, then you can choose a buy position (go long). You can close this position by selling when the higher price is reached. If instead, you think the price of the base currency will go down as compared to the counter currency, then you would sell and enter into a short position. The idea is to cover your position by buying back at a lower price.

Order Types

When a Forex trader wants to enter into a position immediately they place a market order. The downside to market orders is that the markets are moving fast and your order may not get filled at the price you wanted. The difference between prices is called slippage.

Alternatively, if you are concerned about getting the right price, and are willing to wait and enter the market when your conditions are met, then you would place a pending order.

There are several kinds of pending orders in Forex trading:

Buy Entry – This order is placed when you believe the price will begin to rise after first dropping to a certain level. This order is executed when the asking price becomes equal to the pending order.

Sell Entry – This order is placed when you believe that the price will begin to fall after reaching a certain level. This order is executed when the bid price is equal to the pending order.

Buy Stop – This order is placed when you believe that the price will continue to rise after it breaks above a certain level. This order is executed then the ask price becomes equal to the pending order.

Sell Stop – This order is placed when you believe that the price will continue to fall after it breaks below a certain level. This order is executed when the bid price is equal to the pending order.

Stops

A stop loss (or a stop) is an additional type of pending order designed to stop your losses by automatically closing your position if the price moves in a direction different from what you expected.

If you are buying a long position, then you would set your stop somewhere beneath your entry to protect yourself from a sudden drop. If you are selling a short position, then your stop would be placed somewhere above it, just in case there is an unexpected rally.

A stop can also follow the price once it moves in your favor, in which case it is known as a trailing stop. A stop under a long position automatically closes if it is touched by the bid price and a stop placed over a short position is executed when it is touched by the ask price.

Take Profit

Another order which can close your position automatically is called a Take Profit order (TP). In the same way that a stop is intended to protect your position if something unexpected happens, a Take Profit order ensures that your position is closed if your target price is reached when you are not available, or in a fast moving market where the price may touch the target too quickly for you to react. It is generally a good idea to have both a stop and a target when entering new positions.

A target is normally set above the current price if you are in a long position and below the current price if you are in a short position. For long positions, the Take Profit order would be executed when the bid price becomes equal to the amount you set. For short positions, the ask price must equal the take profit amount.

Next Article: Technical Analysis: An Introduction to Charts

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