PART 3: BUY vs SELL

ORDER TYPES

ELISHA AGBAMA
TRADING COACH
Introduction

Basically, what is done in the forex market is trading or buying and selling of
currencies. Just as it is done in the conventional market, we buy when the price is
low and sell when it is high and vice versa.

If you place a buy order on a particular currency pair, say EURUSD, it implies that
you are purchasing the EURO while anticipating a value depreciation of the USD
and; a sell order implies that you are buying the USD in the expectation that the
EURO will depreciate in value against it.
In Forex, we use certain graphic terms to describe buying and selling. When we buy,
we can say that we are long, hawkish or bullish. Also when we sell, we can say that
we are short, dovish or bearish.

One would have to literally hit the buy or sell option to enter a trade, and hit the
close when it is time to get out. Although it is possible to execute trades this way, it
is not very efficient since it requires constant monitoring and can expose you to
unnecessary financial risks. These risks may involve loss from slippages and from
trading without a protective stop-loss order.
Slippage

Slippage refers to the difference between the price you expect and the price at which
the trade is actually filled. For instance, if you want to close a trade that is going
against your prediction and it gets close to your risk limit (point where you do not
intend risk any more money), it could make a burst beyond that level due to market
momentum and the delay of closure . In fast-moving markets, slippage can be
substantial and make the difference between a winning and losing trade.

Certain order types allow you to specify exact prices for trades, which minimizes the
risks associated with slippage. These orders automatically close out losing trades (as
well as winning trades) at pre-determined price levels.
Order Types

When you place a trade in the forex market, it is called an order. There are different
types of forex market order and they can vary between brokers. Order can be
grouped into two:

• Basic orders: These are orders that are offered by all brokers. They include market
order, limit entry order, stop entry order, and stop loss order.

• Special orders: these are orders that are not offered by all brokers.

In this article, we will only discuss the basic order types.

The major advantage of using a market order is that you are guaranteed to get the
trade filled: if you absolutely need to get in or out of a trade, a market order is your
best bet. The downside, however, is that market orders do not guarantee price or
allow for any precision in order entry, which can lead to costly slippage. You can limit
losses from slippage by using market orders only on instruments that trade with
good liquidity.
Order entry interfaces usually have “buy” and “sell” buttons to make these orders
quick and easy.

Typically, a market order to buy is filled at the ask price, and a market order to sell is
filled at the bid price. Keep in mind that the last-traded price isn’t automatically the
price at which a market order will be executed. This is especially true in fast-moving
or thinly traded markets.
The picture above shows an order box for market execution on GBPAUD.
A buy order is filled at the ask price, and a sell order is filled at the bid price. This
accounts for the spread charge which is your broker’s commission for your
participation in the trade. So, before market order, buy or sell goes into profit or
loss, your broker gets his commission through the spread.
Limit Entry Order

These are orders placed to buy or sell at a specified price. There are basically two
types of limit entry order:
• Buy limit order and;
• Sell limit order.
A buy limit order is executed at the specified limit price or lower (better).
Conversely, a sell limit order is executed at the specified limit price or higher
(again, better). Unlike a market order, where you simply press "buy" and let the
market choose the price, you have to specify a price when using a limit order.
When an order is placed below the current market price with an expectation that
the market will go short, activate the pending order and go then go long, it is called
a buy limit order. Whereas, when an order is place above the current market price
with an expectation that the market will go long, activate the order and go short, it
called a sell limit order.

While a limit order prevents negative slippage, it does not guarantee a fill – it will
only be filled if price reaches the specified limit price. You could miss a trading
opportunity if price moves away from the limit price before your order can be
filled – the market can move to the limit price and the order still may not get
filled if there are not enough buyers or sellers (depending on the trade direction)
at that particular price level.
To illustrate the points, let’s say EURGBP is currently trading at 0.85990 and you
want to buy when it reaches 0.85620 which is quite below current market price, you
can place your buy limit order at that price and if the market hit that price, it will
activate your buy order. In the same vein, if EURGBP is currently trading at 0.85990
and you want to sell when it reaches 0.86450 which is quite above the current
market price, you can place your sell limit order at that price and if the market
reaches that level, it will fill your sell order.
Stop Entry Order

This refers to an order placed to buy above the current market price or sell below
it. It is appropriate when it is important to confirm the direction of the market
before entering a trade. Essentially, there are two types stop entry order:
• Buy stop order
• Sell stop order
When an order is placed above the current market price with the expectation that
the market will go long, activate the order and keep going long, it is called a buy
stop order. Similarly, when an order is placed below the current market price with
an expectation that the market will go short, activate the order and keep going
short, it is called a sell stop order.
A buy stop order triggers the market or limit order only if price reaches the stop level,
allowing you to challenge price to reach a certain level. If price reaches the stop level,
it can provide confirmation regarding the direction of the market. Traders often use
key levels, such as support and resistance or Fibonacci levels, when choosing stop
levels.
Stop-loss Order

A stop-loss order is like a safety net. It is an order that is connected to a trade for the
purpose of preventing further losses if the price moves beyond a level that you specify.
The stop-loss is perhaps the most important order in Forex trading since it gives you the
ability to control your risk and limit losses. This order remains in effect until the position
is liquidated or you modify or cancel the stop-loss order.

For long positions, the initial stop-loss is set below the trade entry, providing protection
in the event the market falls. For short positions, the initial stop-loss is set above the
trade entry in case the market rises.
Thank You!!!