Orders: Stops and Limits

In the Forex market traders are able to enter a trade at the current spot rate (also known as a market order where you Sell at the Bid or Buy at the Ask), or alternatively at a future rate – these are known as Orders. There are two main types of orders Stops (also referred to as Stop losses or S/L) or Limits. Orders can work both as entry points or exit point of a trade.

The trading platform follows the market for the trader, whether the trader is in front of his computer or not and whether the computer itself was switched on or not and exercises the order left by the trader when market conditions satisfy the trader’s request.

Open orders can be viewed in the pending orders window on Forex Place’s trading platforms (Metatrader 4 and 4XP Professional).

Limit Order

For instance say one believed that the EUR/USD was going to fall, however he believed that it would rise before it did so, what should he do? Say the EUR/USD rate was as displayed above:

Instrument Bid Ask EUR/USD 1.3428 1.3431

There are three ways that the trader could act:

i) The first would be to sell at the market 1.3428; however this decision would not be optimal since he believed that the rate would rise first before it would drop.

ii) The second way would be to wait by the screen and watch the market until the EUR/USD rate arrived at the price he was looking for and then exercise the trade; however this might mean that the trader be stuck at the screen for some time, time that he may not have.

iii) The third way would be to leave a limit order, the trader could place the order via the trading platform saying at what rate and at what amount he wishes to enter the market. The following would be an example of a limit order: The trader would give an order to sell 100,000 EUR/USD at 1.3480. Since the bid price quoted is 1.3428, the order can not be exercised.

As discussed above the trading platform would follow the market for the trader and as soon as the bid price in the market was to reach 1.3428, the order would be filled. The trader is also able to cancel or change/edit existing orders at will, just as long as they have not been exercised.

The second way to use a limit order would be against an existing trade. Let’s say the trader believed the market was going to reach 1.3480, he would purchase the EUR/USD at the market (1.3431) and then place a limit order to exit the trade if the market reaches 1.3480 as above.

Stop Order

These orders work in very similar ways as the limit order, except in the opposite direction. These orders are seldom used to enter a trade, and some brokers do not have this feature but Forex Place does. Most stops are used to exit an existing trade.

The following would be an example of a stop order: Say a trader had purchased 100,000 EUR/USD at the market at 1.3431 and he believed that the market was going to rise.

He may wish to wait until the market goes higher before he sells or he may place a limit order as above. However the trader may be concerned that he got it wrong and therefore may wish to guarantee that he does not lose more than a specific amount he had in mind. In this case he may wish to place a stop order.

Say the trader is not willing to risk more than $300 on the trade, since we know that a pip is worth $10 on such a trade (100,000*0.0001) the trader is willing to risk 30 pips only.

If he bought the EUR/USD at 1.3431 therefore the worst rate he would be willing to sell at would be 1.3401. And so he would enter a stop loss to sell 100,000 EUR/USD at 1.3401. The trading platform would once again follow the market for the trader and as soon as the bid price in the market was to reach 1.3401, the order would be filled. The trader is also able to cancel or change/edit existing orders at will, just as long as they have not been exercised.

It should be noted that some brokers guarantee stops and others may allow what is known as slippage. Slippage on stop orders is when a trader receives a fill on a stop order that is at a worse rate then what was specified, due to the fast movement of the market.

At Forex Place Stop Losses are guaranteed at the requested rate on existing orders, this is a huge advantage when trading as this offers full protection to clients during gaps.

It should also be noted that Forex Place does not guarantee entry stops, hedge trades that create an artificial entry stop, trades that overlap weekends or time periods where there is no trade (this occurs in instruments that do not trade 24hours) or gaps that occur due to a major event – there may be significant slippage on such trades. Forex Place’s guaranteed stop loss procedures do not cover non Forex instruments such as Metals, CFD’s on Oils, gases, Indices or Commodities.

Orders – OCO’S (One Cancels the Other)

Some brokers offer additional features on their platforms, these are combinations of the basic limit and stop orders above or slight variations of them. Forex Place’s trading platform’s offers all types of orders.

OCO’S (One Cancels the Other)

OCO’s also known as “One Cancels the Other” orders are a combination of both a limit and stop order on an existing trade.

The trading platform would follow the market for the trader and exercise either the limit order or the stop order but not both; as soon as the market price reaches either the limit or the stop order than the order to have reached would be exercised and the remaining order would be cancelled automatically.

For instance taking the previous example given above; say a trader purchased 100,000 EUR/USD at the market at 1.3431 and he believed that the market was going to rise. He may set a limit order to sell 100,000 EUR/USD at 1.3480 as well as a stop order to sell 100,000 EUR/USD at 1.3401 OCO.

If the market was to reach 1.3480 first then the limit order would be filled and the stop order would be cancelled, if the market was to reach 1.3401 first then the stop order would be filled and the limit order would be cancelled – hence the name one cancels the other. OCO’s are offered at Forex Place.

ID’s (If Done’s)

ID’s also known as “If Done” orders are a spin on the OCO order described above. As described above the OCO is placed on an existing trade, while the ID order is placed on a trade that has not yet been exercised.

For instance, say one believed that the EUR/USD was going to fall, however he believed that it would rise before it did so, he was also not willing to lose more than 30 pips on the trade, what should he do? Using the same rates as above the trader would leave a limit order, as above, say an order to sell 100,000 EUR/USD at 1.3480, he would also attach a stop order to the limit order saying to buy 100,000 EUR/USD at 1.3510 stop.

The stop order can only be filled if the limit order is exercised first, hence the name “If Done”. ID limits are offered at Forex Place.

Trailing Stops

A Trailing Stop is a stop order that keeps a set distance away from the current market price and updates according to the movement of the market in the opposite direction of the trailing stop.

This tool is often used by trader’s in a market that is moving in a favorable direction for the trader, and the trader wants to lock in any profits already made.

For instance, say a trader enters into a long 100,000 EUR/USD position at 1.3431 and sets a stop order at 1.3401 with a trailing stop of 30 pips, as in a regular stop order the trader knows that he cannot lose more than the 30 pips on risk.

However, the trailing stop order is not a static order but a dynamic one; for every pip that moves in the direction of the clients position (in this case higher since the client is long EUR/USD), the trailing stop adjusts accordingly.

For instance, if the market moves to 1.3450 then the stop loss would update itself to 1.3420, always keeping itself at 30 pips from the height of the market; the stop order will keep updating itself until it either fills or the original trade is closed. Trailing stops are offered at Forex Place.

Hedging Trades

This feature refers to the ability to keep two or more concurrent trades in opposite directions open without having them closed off automatically by the trading platform.

For instance a client could be long 100,000 EUR/USD at 1.3431 and short 100,000 EUR/USD at 1.3400 at the same time without having the trade shown as closed. Some traders like to hold the trades in this way until the market turns and they can take a profit on one of the trades – this of course means that the other trade would be in a worse position if that were to happen.

At Forex Place hedging trades are available.

Account Balances

Account balances of a trader are displayed in an account balance window within the trading platform.

Common terms that often come up are:

i) Balance – This normally refers to your opening deposit plus or minus further deposits, withdrawals or adjustments, plus or minus realized profits and losses on trades.

ii) Equity – This usually refers to the balance plus or minus unrealized profits and losses on trades that have not yet hit the trader’s statement due to the value date still being in the future.

iii) Used Margin – The amount of funds needed as collateral against the total positions held open. This is usually calculated by the leverage amount multiplied by the total open positions held. For instance if the broker is offering a 100:1 leverage and the client has a total of 500,000 USD in open positions, then the used margin would be 5,000 USD. At Forex Place a leverage of 300:1 is available.

iv) Available Margin – This usually refers to the value of the equity minus the used margin. This amount multiplied by the leverage will show the trader the maximum position he can still open.

Statements

The trader’s statement is the summary of all the trader’s trades and his cash flow. Common terms that often come up are:

i) Deal Date and Time – The date and time of the execution or fill of a trade.

ii) Value Date – The date that the profit or loss on the trades will become realized and affect the trader’s balance.

iii) Ticket or Order number – A serial number identifying the trade or order placed.

iv) B/S – Buy or Sell v) Symbol or Instrument – This will list the currency pair, example EUR/USD,

vi) Quantity – This will list the size of the trade in the major currency,

vii) Rate – The rate that the deal was executed at,

viii) Debit or Credit – The dollar value of the realized profit or loss on a trade. This will be in the same currency as the deposit that is held with the broker.

ix) Balance – the accumulated total of the opening deposit plus or minus further deposits, withdrawals or adjustments, plus or minus realized profits and losses on trades.

The trader statement should also list the open positions and therefore unrealized profits and losses on the open trades as well as the total equity.