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Order Types And Placement

Order types in the forex market are similar to the ones you will find in stocks, or Bitcoin, in a general sense, but there are some important distinctions to be aware of.

Market Orders:

These are the same. You are buying or selling at the best price available at the time. A fill is guaranteed, but the fill price is NOT. (In a fast market often you will not get the price advertised on the quote).

Limit Orders:

Also know as pending orders or resting orders. These are buy/sell orders that are outside the bid/ask spread. They guarantee the price, but NOT a fill. We often use these for profit targets and for averaging into a position.

Stop Orders:

These are orders that when a price is reached, it becomes a market order. These are often used for limiting losses on a trade or act as a trigger to enter a trade.

Stop Limit Orders:

These are resting orders that have a two step process. First, the stop price is reached which then triggers a limit order at a specified price.

For example: Sell Stop: 100 Limit: 101 means once the stop is reached at 100, instead of selling at 100, a limit order will be activated at 101. This guarantees your price, but there is NO guarantee that the market will go back to 101 to fill your order.

Why would anyone use these? They are helpful for automating multiple entries into a position. They can also help reduce slippage by setting the stop and limit prices to the same price.

Note: What is slippage? This occurs when you place an order and do not get the price that you expected. For example, you place a stop order at 95. When the market reaches 95, your broker sends out a market order to fill at the best price. At the time the stop is reached, you get filled at 94.80 instead of 95. 20 cents worse than you expected.

Slippage is a cost of doing business, typically found in futures trading. Markets that are not liquid (wide bid/ask spreads, low volume) are notorious for experiencing slippage. This can also happen in the forex markets during a high profile economic announcement or news event like FOMC meetings or NFP reports.

In the Bitcoin world, it can happen also, usually during a fast market. The bid/ask changes so fast, the broker cannot guarantee the fill at the price that you base your market order on.

Slippage is hardly noticeable on small positions, or infrequent trading strategies. It has much more of an effect on short term strategies like day trading or scalping, especially if the positions are large. Slippage and commissions can make or break a high frequency strategy.

One Cancels Other (OCO):

These are conditional orders that some brokers and platforms also offer (Not standard on Metatrader 4). It means when one order is filled, the other will automatically be cancelled.

These are often used as take profit orders where once the profit target is reached, the associated stop order is canceled. This helps to prevent forgetting about orders left in the market and getting stuck with unwanted positions.

Note: What is FIFO? No, it has nothing to do with the international soccer association. It stands for First In First Out. This is a regulation that is imposed on U.S. brokers that states that if you enter into multiple positions, the first one you enter is the first one that must be sold upon exit.

This means if you buy 1 mini lot of the EUR/USD at 1.1530 and a second mini lot at 1.1500, and then price goes to 1.1550 and then you sell, the first mini lot that is sold is the one you bought at 1.1530. This is only particular to the forex market, and U.S. customers to our knowledge.

Note: When we issue swing trade ideas, we often provide two exits: Target 1 and Target 2. This means we exit the first half of our position at the first target and the second half of the position at the second target.

In forex, in order to do this, the entry has to be done in two SEPARATE orders (Metatrader 4 customers especially). For example, if the entry is 1.1500, T1 is 1.1530 and T2 1.1550, this means you must buy 1 lot at 1.1500 and the second lot at 1.1501, or 1.1499 or some nearby price.

This will create two separate independent trades in the eyes of the broker. You should be able to set an individual stop and target for each trade.

Metatrader 4 WILL NOT LET YOU DO THIS. If you set a separate target for both orders, the platform automatically assigns your most recent input as the target for BOTH orders.

The solution is to set both to the higher target and exit T1 MANUALLY. This can be very inconvenient, but that is a conversation between you and your broker.

Remember, broker/dealers in the forex space are like the house at a casino. It is NOT in their best interest for you to win. They may not be able to directly prohibit you from winning, but they will put as many legal obstacles in your way as possible.

How We Place Trades:

We usually do not enter or exit trades using straight out market orders. This is reactive, and we do not react, we anticipate. Our swing and position trades are carefully planned ahead of time.

When we send out a swing trade idea, the text message will look like this:

EUR/USD
Buy Stop: 1.1530
SL: 1.1485
T1: 1.1593 T2: 1.1630
R:R 1.5

Contained in follow up email:

Reason: Continuation pattern (along with a more detailed explanation).

Cancel order if not filled after 24 hours.

Buy Stop (trigger):

We place a Stop order that will trigger an entry at market when the price reaches that specific number. This order is usually entered in advance, before the price reaches the entry level.

Note: Forex brokers often enforce a “threshold” or number of pips the market must be away from the order at the time of placement. This is in place to discourage day traders or high frequency automated systems from capitalizing on the large degree of noise in the price action. Remember, when you win, they lose and they are not in business to lose. For example, Forex.com (U.S.) will NOT let you place a pending order unless it is 10 PIPS OUTSIDE THE MARKET.

This means if EUR/USD is at 1.1520, and you want to place your Buy Stop at 1.1530, they won’t let the order be placed. You would have to place it at 1.1531. Each broker sets their own threshold so make sure to ask them what it is if you do not know.

SL (Stop Loss):

This is the order we place that will lock in our loss if we are wrong. Stop losses are particularly important for short term strategies like swing trading. This is one way to define and control risk. These are orders that become a market order if the price is reached. In a fast market, it is possible to experience some slippage where the order is filled slightly worse than the price that you specified.

T1, T2 (Target 1, Target 2):

These are limit orders that are placed at the profit targets at the time we enter the trade. We sell half of our position at each target. This allows for an average profit and allows for an improved reward/risk ratio if both targets are reached.

Remember in forex, you can’t just sell a portion of your original position (at least not with U.S. brokers). The solution to this is to create 2 separate entry orders, and manage each half of the position individually.

These rules may be different for non U.S. brokers. Managing each position individually means each half has its own stop, and target. For U.S. brokers (Forex.com) we have to manually exit half of our position at the first target.

R:R (Reward/Risk Ratio)

This represents how much risk we are taking for the expected reward. Ideal ratios are 2.0 or greater, but for short term trades, we will accept 1.0 or greater. Anything less than 1.0, we avoid the trade altogether.

To make it clear: 2.0 is the same as 2:1 reward/risk. You win 2 dollars for every 1 dollar at risk. If we risk 100, we expect to make 200. If we are wrong 2 times, and right 1 time, we are at break even.

Reason:

This is where we explain the general reason for the trade. These will usually be more on the technical side since we do not trade forex on fundamentals.

Cancel if not filled after 24 hours:

If the original entry order (Buy Stop or Sell Stop) is not triggered, we cancel the order after 24 hours. Our main priority is to conserve capital and control risk, not gamble. Leaving unfilled orders in the market presents the possibility of getting filled during market conditions that no longer fit our original criteria for entering. Structure changes fast in the forex markets and there is no reason to get caught in erroneous trades.

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