Forex / Foreign Exchange Market

Foreign Exchange Market

There are various different ways in which traders can place orders to buy and sell currencies and this gives foreign exchange traders considerable flexibility in planning their trading strategies and allows them to both maximize their profits and minimize their losses.

Market Order

The simplest form of order is the market order in which the trader simply buys or sells a currency pair at the current market price. Because of the enormous size of the market and its high liquidity there is little if any delay or slippage in the market and market orders are in essence guaranteed.

Limit Order

A limit order allows the trader to set the price at which he wants to take his profit and close out his position. For example, where a trader has bought GBP/USD at 1.9450 he might place a limit order at 1.9465 so that, if the price rises to this level, his position would automatically be closed and he will take his profit.

Stop Loss Order

A stop loss order is another form of limit order but in this case it indicates the maximum loss which a trader is prepared to take. In our example above the trader could place a stop loss order at 1.9430 so that he would limit his losses to 20 pips if the market turned against him.

Entry Order

An entry orders is an order which is only filled when the market meets certain conditions which are specified in the order. An entry order can take the form of either a limit entry order or a stop entry order.

Limit Entry Order

Let's start by assuming that the market price for the GBP/USD is 1.9740-45. This means that a trader can enter the market to sell at 1.9740 or buy at 1.9745. A trader could place a limit entry order to sell above the current market price at a level of say 1.9750 and this order would then only be executed if the market price reached this point. Similarly, he could place an order to buy at a price below the current market price - in this case below the buying price of 1.9745. So, were the trader to place a limit entry order to buy at 1.9730 this order would only come into effect if the price dropped to this point.

A limit entry order is commonly used where a trader believes that a currency is trading within an upper and lower range and is expecting a reversal in the currency's price movement.

Stop Entry Order

A stop entry order is frequently used when a trader believes that a currency which has been trading within an upper and lower range is about to break out of that range and he wants to either buy at a price above the present market price or to sell at a price below the current market price.

Our GBP/USD trader above, who can enter the market to buy at 1.9740 or to sell at 1.9745, might place an order to sell at say 1.9735. In this case the trader believes that the currency will reach this level and then continue to fall. Alternatively, he might place an order to buy at say 1.9750 again believing that the market will reach this level and continue to move in the same direction.

A stop entry order is commonly brought into play when a trader foresees large movements in the market.