Type of Orders Every Trader Must Know!

Orders represent the fundamental directives that traders convey to their brokers, specifying both the timing and desired price for executing trades on a particular financial instrument.

Market Orders

Definition and Purpose

Market orders are instructions tailored for the swift execution of buying or selling a particular trading instrument, like a currency pair, at its current market price.

The primary objective of market orders is to ensure the immediate execution of a trade, guaranteeing that it is filled at the prevailing market rate without delay. Market orders are primarily focused on speed and efficiency, making them the preferred choice for traders who value rapid entry or exit from a position, at the market price prevailing at the time. Understanding what is a pip in trading is crucial for traders using market orders, as it helps them measure small price movements.

Executing Instant Trades

When it comes to executing trades at lightning speed, market orders serve as your express lane in the world of trading. Picture this scenario: You’re intently monitoring the forex market, and suddenly, you spot a currency pair that’s on a rally in terms of its price. The last thing you want is to miss out on this potential opportunity, so you swiftly employ a market order to purchase it right on the spot at the prevailing market price. This is where the real strength of a market order becomes apparent – it’s your direct route to immediate participation in the market’s dynamic movements. As an additional strategy, traders can combine market orders with proprietary trading tools to maximize efficiency and precision.

Pending Orders

Pending orders, also known as conditional orders or entry orders, are pre-defined instructions that traders set to open a buy or sell trade at a specific price level in the future. Pending orders are essentially “sleeping” orders waiting to activate when the price conditions are met in the future.

Pending orders are not guaranteed to be executed. If the price of the instrument never reaches the specified price level, the order is never executed.

Types of Pending Orders

Buy Limit Order

Definition: A buy limit order is placed below the current market price, specifying the Ask price at which the trader wants to enter a Buy trade. If the market price falls and reaches the limit price or lower, the pending order is converted into market order and a Buy trade is opened. If not, the pending order is not executed.
Example: Let’s say EURUSD is currently trading at an Ask price of $1.1000, a buy limit order could be placed at $1.0950. If the Ask price drops to $1.0950 or lower the order will be automatically executed. If the Ask price doesn’t drop to $1.0950 it will not be executed.
Purpose: Traders use buy-limit orders when they anticipate that the price of an instrument will reach its support level before resuming an upward price movement. The buy limit is set at the support level so that when the price starts rising, the trade could be closed at a higher price capturing profits.

Sell Limit Order

Definition: A sell limit order is the counterpart of the buy limit order. It is placed above the current market price, specifying the bid price at which the trader wants to enter a Sell trade. If the market price rises and reaches the limit price or higher the pending order is executed and a Sell trade is opened. If not, the pending order is not executed.
Example: Let’s say EURUSD is currently trading at a Bid price of $1.1000, a sell limit order could be placed at $1.1050. If the Bid price rises to $1.1050 or higher the order will be automatically executed. If the Bid price doesn’t rise to $1.1050 it will not be executed.
Purpose: Traders use sell limit orders when they anticipate that the price of an instrument will reach its resistance level before resuming a downward price movement. The sell limit is set at the resistance level so that when the price starts falling, the trade could be closed at a lower price capturing profits.

Buy Stop Order

Definition: A buy-stop order is set above the current market price, specifying the Ask price at which the trader wants to enter a Buy trade. If the market price rises and reaches the limit price or higher the pending order is executed and a Buy trade is opened. If not, the pending order is not executed.
Purpose: Traders use buy-stop orders when they anticipate that the market price will keep increasing after reaching a key resistance level and witnessing a bullish trend. The buy stop is set at the resistance level so that when the price rises above this level, the trade could be closed at a higher price capturing profits.
Example: Let’s say EURUSD is currently trading at an Ask price of $1.1000, and the trader anticipates that the price of the instrument will keep increasing once it breaks the resistance level of $1.1100, so the buy stop can be placed at an ask price of $1.1100.
If the ask price rises to $1.11000 or higher the order will be automatically executed. If the trader’s anticipation is correct and the price keeps increasing the trade can be closed at a higher bid price capturing profit.

Sell Stop Order

Definition: A sell-stop order is placed below the current market price, specifying the Bid price at which the trader wants to enter a sell trade. If the market price falls and reaches the limit price or lower the pending order is executed and a Sell trade is opened. If not, the pending order is not executed.
Purpose: Traders use sell-stop orders when they anticipate the market price will keep on declining after reaching a significant support level and witnessing a bearish trend. The sell stop is set at the support level so that when the price starts falling, the trade could be closed at a lower price capturing profits.
Example: Let’s say EURUSD is currently trading at a Bid price of $1.1000, and the trader anticipates that the prices will drop significantly once it falls below $1.0900, so the sell stop can be placed at a bid price of $1.0900. If the bid price falls to $1.0900 or lower the order will be automatically executed. If the trader’s anticipation is correct and the price falls the trade can be closed at a lower ask price capturing profit.

Exit Orders

Introduction to Exit Orders

Exit Orders are pre-defined instructions that traders set to close a trade( buy or sell) at a specific price level in the future. Exit orders help traders to automate their exit strategies. So even if a trader has opened a trade at an unfavourable price he can still use the exit orders to close them efficiently.

Take-Profit (TP) Orders

Definition: Take-profit orders, often abbreviated as TP orders, are instructions set by traders to automatically close a position at a specific price level, securing a predetermined profit.
Purpose: The primary objective of set Take profit is to lock in gains. When a trade reaches the predefined TP price, the order is executed, ensuring that profits are realized before the market can reverse. TP orders are invaluable for disciplined traders who seek to capitalize on winning trades while minimizing the emotional aspect of trading decisions.

In the case of sell trade, take profit is set at a price lower than the current ask price. When the take profit is triggered the trade is closed at the assigned ask price or lower. For Instance: If the current Ask price is at $1.1000, the take profit order could be placed at $1.0900 to close the trade and secure the gains if the price moves in favour of the trade. 

In the case of buy trade, take profit is set at a price higher than the current bid price. When the take profit is triggered the trade is closed at the assigned bid price or higher. For Instance: If the current Bid price is at $1.1000, the take profit order could be placed at $1.1100 to close the trade and secure the gains if the price moves in favour of the trade.

Stop-Loss (SL) Orders

Definition: Stop-loss orders, or SL orders, are instructions set by traders to automatically close a position at a specific price level limiting potential losses.
Purpose: SL orders are essential for risk management. They act as a safety net, ensuring that a losing trade is exited before the losses become excessive. Traders use SL orders to define their acceptable level of risk, thereby protecting their capital from significant downturns in the market.

In the case of buy trade, a stop-loss order is set at a price lower than the market bid price. When the stop loss is triggered the trade is closed at the assigned stop price or lower.
Example- A trader opens a buy trade of EURUSD at $1.08500. The market bid price was hovering at $1.08480, so the trader placed a stop-loss order at $1.08400 to protect from losses if the price goes against him. The stop loss will be triggered if the market price reaches the assigned stop loss price or lower.

Let’s say the very next hour price goes down triggering the stop loss order and the stop loss order is executed closing trade at $1.083000. However, the market continues to drop and close at $1.0810000. While the stop-loss order couldn’t protect the trader as originally intended, it still limited the loss to much less than it could have been if the stop-loss wasn’t assigned to the order.

In the case of sell trade, a stop loss order is set at a price higher than the market ask price. When the stop loss is triggered the trade is closed at the assigned stop price or higher. For Instance: If the current Ask price is at $1.08600, the stop-loss order could be placed at any price higher than the current Ask price of $1.08600.

Trailing Stop Orders

Definition: Trailing stop orders are dynamic instructions that automatically adjust the stop-loss level as the market moves in a favourable direction. If the market moves in the trader’s favour, the trailing stop level moves accordingly, “trailing” the market price.
Purpose: Trailing stops are employed to maximize profits during strong trends. They help traders secure profits while still benefiting from winning trades.

As the market moves in the desired direction, the stop-loss level is adjusted, ensuring that, if the market reverses, the trader can exit the trade with gains already secured.

Example: Let’s say you buy one contract of S&P 500 at $4,500.00. You want to protect your position from a large downward move, but also lock in some profits if the price rises. You decide to use a fixed-step trailing stop of 20 pips, which means your stop loss order will move up 20 pips every time the price moves up 20 pips in your favor.

Now, your trailing stop is activated and will follow the price movement. Here are some possible scenarios of how your trailing stop will work:

• If the price drops to 4,480.00, your stop loss order will remain at 4,480.00, which is 20 pips below your entry price. You will lose $1,000 if your stop loss is triggered.
• If the price rises to 4,520.00, your stop loss order will move up to 4,500.00, which is 20 pips below the current price. You will break even if your stop loss is triggered.
• If the price rises to 4,540.00, your stop loss order will move up to 4,520.00, which is 20 pips below the current price. You will make $1,000 if your stop loss is triggered.

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