Order is an instruction to buy or sell on a trading venue such as a stock, commodity or futures exchange.
It can be executed through a broker, manually or electronically.
Large orders are usually placed using trading algorithms, while small orders are placed by traders.
Different types of trading orders
1. Market Order
A market order is an order to buy or sell a security at the current best market price.
As long as there are willing buyers and sellers, it will usually be executed immediately.
For example, in the Forex market, if the current EUR/USD exchange rate is 1.2100 and you place a market order to buy EUR/USD, assuming there is a seller, your order will be executed around that price.
2. Limit order
A limit order is an instruction to trade a security at a specific price or a better price.
Buy limit orders are executed at the limit price or lower, and sell limit orders are executed at the limit price or higher.
For example, the GBP/USD currency pair is currently trading at 1.4000. However, you believe that if it hits 1.3950, it will rise again.
You can place a buy limit order at 1.3950. If the price does drop to that level, your trading platform will automatically execute a buy order at that price.
3. Stop loss order
A stop-loss order or stop-loss order is an order to buy or sell when a stock reaches a specified price, called the stop-loss price.
When the stop price is reached, the stop order becomes a market order.
Suppose you have a long USD/JPY position at 109.50, but want to limit potential losses. You can place a stop loss order at 109:00.
If the price drops to 109.00, your stop order will be triggered and become a market order, selling your position at the best available price.
4. Stop limit order
A stop-limit order is a hybrid order that has the characteristics of both a stop-loss order and a limit order.
When the stop price is hit, the order becomes a limit order, trading at the specific limit price or better.
For example, let’s say you have a short EUR/GBP position at 0.8600 and you think it will rise if it reaches 0.8650.
To limit potential losses, you can place a stop limit order with a stop price of 0.8650 and a limit price of 0.8660. If the price reaches 0.8650, your order will become a limit order to buy at 0.8660 or higher.
5. Good until canceled (GTC)
GTC orders remain in the system until the trader cancels the order or the order is filled.
Such orders can be held for months or even years, depending on the trading platform’s policies.
If you expect USD/CAD to hit 1.3000 at some point in the future, but are currently trading at 1.2500, you could place a GTC order at 1.3000.
Your order will remain in the system until the price reaches 1.3000, or you decide to cancel the order.
6. Same day order
Same-day orders are only valid on the day they are placed. If it is not executed on the same day, the order will become invalid.
Understand the importance of orders
Understanding the different types of orders is crucial for traders, as each type has a unique impact on trading results.
Each has unique advantages and is suitable for different trading strategies. For example, market orders are best for speed of execution, while limit and stop orders allow for greater control over the entry price.
In the fast-paced Forex market, the difference between profit and loss often depends on the type of order placed.
Understanding how to use different order types can help traders optimize their strategies and better manage potential risks.
While orders are an important tool for implementing a trading strategy, it is important to remember that they are also an important part of risk management.
Stop-loss and limit orders, in particular, can help protect against adverse market moves, lock in profits, or limit losses.
However, no order can completely eliminate risk, especially in volatile markets where prices can gap or move rapidly.
It is important to combine the use of orders with other risk management techniques such as position sizing and portfolio diversification.