In a market that is as volatile and liquid as the forex trading markets are, you need to always be on top of your game to respond to the changing market conditions. That is not only so you can spot opportunities to turn a profit, but also to protect yourself from risk. And while the markets themselves are a great source for information, this is not the only approach you should take to planning out and executing your trades.
How you structure and schedule your orders is a critical tool for any trader hoping to maximise their profits. Not only can you use orders to enter into a trade – i.e. telling your trading platform you want to ‘buy-in’ at a specific price point – you can also use them to help protect any profits you make, as well as to protect you from any potential risk.
Using different types of orders allows you to develop and implement a trading strategy that reflects your preferred trading style. Using different order types will enable you to quickly respond to changing market conditions and to protect your portfolio.
But what are the different order types, what do they do, and how can you use them?
This is the most basic and commonly used order type. A market order is a direction to your trading platform to enter you into the market at whatever the current price point is when the order is received. This applies to both buying into the market as well as exiting it – i.e. selling your asset – at whatever the best available price is when the order is received.
Essentially, a limit order is a direction you give a broker through your trading platform to execute a transaction – either an instruction to buy or sell instruments – at a specified price or better.
It’s called a ‘limit’ order because you are setting a ‘limit’ to the price point at which you want to execute the order. You can use it to buy or sell currencies below or just above current market prices. You use this order type to take some of the risks out of sudden price fluctuations in the markets.
This order type is a direction to your broker to exit a trade once a certain price point has been reached. The aim with this order type is to limit the potential loss you might suffer in the process of a trade – i.e. buying a currency at one price, but selling once the market prices drop to a certain point.
Although the temptation is to avoid using these to give you better control and to give the markets a chance to rise to better prices, stop-loss orders are an essential way of protecting yourself from risk.
A take-profit order is an instruction to your broker to close a trade automatically once the price reaches the desired profit threshold. This allows you to take the profit you have made on a trade before the markets reverse and leave you at a loss. Usually, you would use a combination of stop-loss and take-profit orders to protect yourself from downward trends and to protect profits you make on upward trends.
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