If you are relatively new to Forex, you may know how to initiate a simple buy and sell trade with your favorite broker, but you may not be aware that there are several different ways to enter your trades, called order types.
Market Order
The market order is probably the most common entry. The market order is used to enter the market at the best available price. In other words, if EUR/USD is trading with an ask price of 1.3280, and you put in a market order, you will buy the currency at 1.3280, which is all well and good.
The only time to be wary of using a market order is during illiquid markets. For example, you put a market order to buy EUR/USD. If the market is particularly volatile, it is possible for EUR/USD to gap up on the next tick, and your best available price could be higher than what you were expecting.
Limit Order
A limit order entry is placed when you want to buy the market below or sell it above the current price.
So, if EUR/USD is trading at 1.3280 and you want to buy it at 1.3270, you use a limit order placed below the market. Generally, you use a limit order when you want to enter at a better value level.
Stop Order
A stop order can be used to enter the market at a level higher or lower than it is now without having to wait around for the market to actually hit the price.
For example, you want to buy EUR/USD when it breaks out past 1.3290, but the current price is only at 1.3280. You can simply place a stop order to enter the market when the price touches 1.3291.
We also have a more detailed explanation of pending orders (limit and stop) if you want to learn more.
Stop-Loss Order
A stop-loss order is used to close your trades and is the best way to protect your capital. It is a secure way of making sure that you cannot lose any more than a specified amount if your trade goes against you.
For example, if you have bought EUR/USD at 1.3280, you can put a stop-loss in at 1.3260, meaning your loss is limited to only 20 pips.
The only way you could lose more than this is if the market gaps below your stop, at which time your stop will be filled at the next best available price. This happens very rarely.
Trailing Stop Order
The trailing stop order is a useful order for tracking the market when you do not want to spend your whole time watching the screen. You can enter a trailing stop order at a specific level away from the market and the stop will then follow your trade up, or down, as it goes, thereby locking in a certain amount of profit.
For example, you bought EUR/USD at 1.3280 and placed your trailing stop 10 pips away. Supposing EUR/USD advances to 1.3300, your trailing stop will have moved up 20 pips to the 1.3290 level and you will have already locked in 10 pips profit.
You can learn more about using trailing stop in MetaTrader if you like use that platform for trading.
