Forex Trading Made Easy

Understanding the Mechanics of Trading with Forex

As a trader, you need to understand the mechanics of forex trading. By that, we mean the type of buy/sell orders you can make.

Order Types

Basic Order Types

1. Market Orders

When you make a market order, you are transacting at the current market price. There is no waiting for a predetermined price.

2. Limit Orders

This order is placed when you want to buy or sell a currency pair at a predetermined price you choose. There are 2 components to this order, the price you set to buy/sell a specific currency pair and the duration for the order to be active.

3. Stop Loss Orders

The purpose of such a limit order is to limit the losses. Assuming your risk appetite is for a certain level of losses; you may want to use this to prevent the open position from worsening beyond what you cannot afford to lose.

4. Take Profit Orders

The purpose of such a limit order is to take profit at a level which you think you are satisfied with. In forex trading, it is good not to be too greedy. By setting a Take Profit order, you also protect yourself against any unforeseen circumstances that could force your currency pair price to move against you.

Advanced Order Types

These are not available to all forex trading brokers.

1. Good Till Cancelled (GTC) Orders

Such orders remain in force until the trader decides to cancel it. Do not rely on the broker to do so on your behalf as they would not act for you.

2. Good For The Day (GFD) Orders

These orders remain active until the end of the trading day.

3. Order Cancels Other (OCO) Orders

This is a hybrid of 2 orders – a limit and stop loss order. Basically, you are placing 2 orders, one above the market price, and the other below. What happens with this OCO order is that, they are mutually exclusive, meaning that when one takes place, the other is automatically cancelled.

Here is an example. Assuming you are trading the EUR/USD pair. The current price may be 1.2771. The limit order is set to ensure that the ask price is placed only if the currency pair reaches a certain rise say 1.291. The stop loss order likewise would be set such that if the currency pair price drops to a certain level like 1.271.

The purpose of using OCO orders is such that you as a trader can free yourself to engage in multiple trades or simply just so that you need not monitor the movements so closely.

The buy/sell interface of each forex trading broker may differ so be sure to familiar yourself with them before you employ any of these orders to start profiting.

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Filed under: Forex Trading, Learn Forex Trading by admin