As a trader, there are a few ways you can enter a trade and which one you use can actually make a difference in the outcome of a trade. Certain orders, depending on when used, can cause your position to suffer from slippage. This essentially means that your order will get filled at a price different than what you expected. For the most part though, retail Forex traders don’t suffer too much from this unless they trade around news releases. For the most part, the slippage is small, if any, in normal market conditions. It really all depends on what happens between pressing the order button and the order getting filled.
Market Order: This is the basic way of entering a trade. When you click the buy/sell/close button on your platform, you are requesting a transaction at the best available market price. The issue with there are that the bid/ask price is constantly fluctuating. If you see a price of 1.3400 for example and you want to enter a buy by pressing “Buy”, by the time the order occurs, price may have gone down or up. If price goes up, you bought more expensive and with down, you got a cheaper price.
Limit Order: I personally prefer these types of orders. These orders are only filled when price reaches the price you have chosen to enter the market. My broker actually uses the word “limit” to describe something that actually has two names which depend on whether you are buying or selling
Buy Limit: Once you set these in your broker platform, you have set instructions to buy if the market reaches your price or lower. Limit buys are always set BELOW the current market price. The first yellow line is the low of that bar and the bottom is where you would set a buy limit order. If/when prices reaches that level, you will be entering the market long.
Sell Limit: The exact opposite of buy limit. Your order to enter the market short is set ABOVE current price. The bottom yellow line is the high of that bar and the top yellow line is where you have placed an order to short the market if price reaches that level.
The positive of setting a limit order is that you will get filled at the price you choose. The negative is price may almost reach your entry price and then turn leaving you on the sidelines without a fill.
Stop Order: These are an interesting type of order and they do have a unique quality about them and that is they combine the attributes of both limit and market orders. For brevity sake, these orders are the opposite of the limit orders. For example, if you choose to enter a market long, setting a buy stop order has you setting an order ABOVE the current price. Sell stops have the order set below current price. The main drawback when you choose to use a stop order to enter the market is the same drawback you get with market orders and that is…best possible price. Below, you set an order to catch a break of the highs at the yellow line. It is possible, depending on the market conditions, that you do not get filled until the green line.
That is called slippage, and when designing or testing a system, keep it in mind as slippage can have a direct impact on the profitability of your trading system.
Stop-Loss Order: One of the most important orders you should know and use is a stop-loss order. When in a trade, these are the orders that can get you out if the trade is not doing very well. It can also get you out of profitable trades if you “trail” the stop behind price to lock in profit. Many traders love the set and forget ability of setting a stop-loss order. You are essentially safe in knowing that the risk you can tolerate is protected by a stop order and you don’t have to remain glued to the trading screen. Ensure you set one the moment you enter a trade.
Next up in this series, let’s cover leverage and margin which is essentially a loan and collateral.