What Are Orders In Trading?

Orders, in trading terms, refer to how a trader enters or exits a trading position.

Forex orders present traders with options that enable them to optimize both current and future trading opportunities by taking quick action. That way, a trader is not confined to buying or selling at the current market price.

Types of Forex Orders

Market Orders

A market order is an order that will enable you to enter a trade at the current market price. It can be a buy or sell order, and when you execute it, your orders are instantly filled at the best available price.

Take, for instance, EUR/USD. Let’s say the current bid price is 1.3145, and the ask price is 1.3147. If you wish to buy EUR/USD at the current price on your MT4 chart, it would be sold to you at 1.3147. All you need to do is click buy. Instantly, the buy order will be executed by your trading platform at the price.

Limit Orders

A limit entry order enables you to enter the market at a specific price. It can be placed to either sell above the market or buy below the market price. For example, the EUR/USD pair is trading at 1.1050, and you feel that the current price level is low. You want to wait for the price to reach 1.1070 so that you can go short.

You have two options:

  • sit in front of your computer screen and wait until the price hits 1.1070 so that you can click a sell market order
  • or set a limit order at 1.1070, walk away from your computer and go about your day

If the price hits 1.1070, a sell order will be executed automatically by the trading platform at the best available price. Obviously, the latter option makes sense!

Stop Entry Order

A stop entry order enables you to enter the market only if it moves in your favor.

If the market is in a range, and you want to enter at the breakout of the range, for example, if your analysis suggests that if the price of an asset reaches a certain price, the momentum of the market will continue to drive the price of the asset higher still, you can put a buy stop entry order above the current price, so that the trading platform will fill your order on the trade to go long.

If the current price of Gold (the asset) is $1,200, and your analysis leads you to believe that the price will remain around this price, the market is likely to stagnate. However, if the price reaches $1,220, the market will gain momentum and the price is very likely to rise upwards of $1,240. In these circumstances, you may wish to create a stop entry order to buy 50 shares in Gold at $1,220 (your entry point). This trade will only be executed if the price reaches your entry point.

Stop Loss Order

Stop-loss order is added to a trade to cushion a trader from incurring further losses if the market acts against them. It is different from other types of orders because, whereas the other orders get you into a trade, a stop-loss order gets you out of a trade. For example, assume that you buy an asset hoping for the market to move higher with a stop-loss order below, but the market begins to decline. If the price hits the stop-loss order, it will be executed by the platform to exit the trade for a loss, limiting your downside. If the market collapses and you don’t have a stop-loss order, your losses can be significant. It is a defense mechanism employed to protect your capital investment.

Trailing Stops

A trailing stop is a kind of stop-loss order in which the stop-loss price is at a certain percentage, instead of being set at an absolute amount. Since the stop-loss price is not a fixed dollar amount, the trailing stop moves with price fluctuations.

When the price moves up, the trailing stop moves along with it, but when the price stops increasing, the trailing stop becomes active at the new higher value.

For example, if you have bought $200 of shares and you don’t want to lose more than 5% of your capital, but you want to lock in more profits should the values of your shares increase and you don’t want to sit in front of the computer monitoring the price fluctuations, employing a trailing stop would alert your broker to sell your shares if the price falls more than 5% below your $200 capital investment, $190, and your order would be filled automatically.

However, if the value of your shares rises to $400, the exit point of the trailing stop would follow, now alerting your broker to sell, only if the value of your shares falls below $380, locking in your profits of $180.

A trailing stop enables you to lock an investment’s upside while protecting you from the downside.

How Are Orders Executed?

Execution refers to the completion of a sell or buy order for a security. It happens when an order is filled. It is the role of the broker to decide the best way to execute an order submitted by an investor.

Orders, in trading with a broker, are executed in the following ways:

  • Order to the floor: your broker sends the order to the floor broker, who fills it upon receiving it. A human trader processes the order; meaning it can be time-consuming
  • Order to the market maker: market makers provide liquidity on exchanges like NASDAQ. An investor’s trade may be directed to a market marker by the broker for execution
  • Electronic communications network (ENC):  buy and sell orders are matched up electronically by efficient computer systems
  • Internalization: the order is executed in house, where the broker holds the inventory of the stock

How Are Orders In Trading Markets Priced?

Brokers price orders in trading markets so that they can make money from them in the following ways:

  • Spread: by increasing order spillage during execution, brokers make money. Order spillage occurs when a trader’s order is executed at a price that is slightly lower or higher than it was placed with the broker
  • Selling order flow:  the order of a client left with the broker is sold to a large forex market maker

Margin Calls

A margin call occurs when your account’s equity dwindles to a threshold where the losses incurred in a trade cannot be covered by the amount of money in your account. This will occur when your account’s equity goes below the maintenance requirements of your brokerage house.

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