Trading Order Type Primer

Last updated on February 28th, 2020

As a trader, there are a few trading order types you should know and the one you use can actually make a difference in the outcome of a trade or if you even get into a trade in the first place.

Certain orders, depending on when used, can cause your position to suffer from slippage.

This essentially means that your trading 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.

 

Trade Entry Types

Market Order:  This is the most 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 this is 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 Entries

These orders are only filled when price reaches the price you have chosen to enter the market at.  My broker actually uses the word “limit” to describe something that actually has two names which depends 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.  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 or better.

The negative is price may get close to your set price but not trade at the price.  The market will then roll over without you on board.

 

Stop Entry Trading 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.

They sit in the market waiting for price but when executed, they act as market orders and suffer from the same issues those orders have.

Think of these orders as 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 unlike limits where you would set it below price.

Sell stops have the order set below current price.

Below, you set an order to catch a break of the highs on a buy stop 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.

 

Protective Stop Orders

One of the most important orders you should know and use is a stop-loss trading 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.

…….Almost protected.

 

Slippage On Trade Orders

You can still suffer from slippage because of the same issues stop orders and market orders have.  They sit like limit orders and fill like market orders.  As well, depending on your trading instrument, price can gap through your stop loss order bringing you a loss much greater than you expected.

In designing your trading strategy, it is important to have many details listed including how you will enter a trade.  The differences can affect your expectancy of the system and even turn a winning system into a loser.

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