Understanding Forex Order Types: Buy Limit, Buy Stop, Sell Limit, Sell Stop, & Market Order
Find out in this article what are and how to use the most common order types available to the MT4 platform and all the different Forex market order types available to traders to enter the market: limit and stop orders.
We will be illustrating the method and reason for using each type, along with their advantages and disadvantages.
Table of Contents
- Market Orders
- Closing Trades at Market Price
- Pending Orders
- Stop Entry Orders
- Limit Entry Orders
- Standard Exits: Stop Loss and Take Profit
A market order, the most common type of order, is used when you want to execute an order immediately at the market price, which is either the displayed “bid” or “ask” price on your screen. If you are going to buy a currency pair, you will buy at the “ask” price, and if you are going to sell a currency, you will sell at the “bid” price.
Usually, with STP or ECN brokers, the quotes you see are streamed to you as the tradable prices (the best bid and offer) collected from 10 or more top-tier banks. If you decide to open or close a position, your order will be executed at the best price available on the market directly from the liquidity providers.
Depending on how the broker has set up their execution technology, your market order will be generated as either an Instant Execution or Market Execution. What is the difference? An instant execution broker allows to you place the stop loss and take profit at the same time as your market order, whereas a market execution broker has you place a market order only, without an initial stop loss and take profit.
Only after the order has been executed can you go back and modify the order to include a stop loss and take profit. How can you tell them apart? When you open the market order window, you can quickly spot the distinction.
Market Order as Instant Execution:
You can see here in this window options to change the volume, that is, how many lots you want to trade (in this example, 0.01 = 1 micro lot), an option to modify the stop loss and take profit (first clue), and of course, it says Instant Execution in the Type field (second, more obvious clue). Being able to indicate your stop loss and take profit at the same time as your order can be very handy.
It saves you the trouble of adding them in later, which you would have to do if you only had a market execution type broker. Other features of market orders to consider. In the above example, if you are going to buy a currency pair, you will buy at the ask (Buy) price, which you can visualize as the blue Buy box, and you can also see this price as the blue tick chart in the chart window.
If you are going to sell a currency, you will sell at the bid (Sell) price, which you can visualize as the red Sell box, and you can also see this price as the red tick chart. Notice also how you can enable maximum deviation from quoted price. If you indicated 5 pips as your desired deviation, then as much of your order as possible will be filled no more than 5 pips from the current price. If the price suddenly moves more than that, the order will not be filled. The advantage here is the control of slippage and Price Certainty.
Market Order as Market Execution:
Previously, we looked at how the instant execution broker gives the ability to add a stop loss or take profit alongside the market order. The advantage of that method is speed and convenience. Above is an example of a market execution broker that allows you to only place a market order, without the ability to simultaneously place a stop loss or take profit.
Notice how the stop loss and take profit boxes are greyed out, meaning you cannot use them with the market order. Another drawback to this type of broker is that you cannot set the maximum deviation in pips from the quoted price you want to execute at.
The pros to this type of broker is that they are generally linked up to a STP or ECN technology that routes the order directly to the best bid/ask prices of the liquidity provider, instead of the market maker broker taking on the other side of the trade and consequently delivering less than ideal prices or execution speeds.
Pros to Market Orders (either instant or market execution)
- A market order requests immediate execution, and this is a good thing when you definitely want to be in the trade now, without delay.
- Because immediacy of execution is very important, market orders are the most popular form of entering trades.
- Because of the liquidity of Forex, market orders generally are filled at your quoted bid and ask prices, with minimum slippage, re-quote and error.
Cons to Market Orders
- At times a market order can and does suffer from slippage and re-quote during intensely volatile periods, such as occurring during critical news announcement. You may be re-quoted the price, not necessarily because the broker is trying to intentionally screw with you, but because the current market price may have rapidly changed since the last market snapshot.
Closing Trades at Market Price
Closing a trade at market is the fastest way of exiting your trade without delay. In order to do so, you need to right click on the open order from within the Terminal, and select Close Order.
The box that appears looks very much like the Instant Execution Box, but now there is a highlighted box in yellow called Close #xxxxx buy 0.04 EURJPY at 112.1000. The quoted close price is the quoted bid (sell/red) price if the open order was a buy, and it is the quoted ask (buy/blue) price if the open order was a sell.
If you press this yellow bar, your ticket order will be instantly closed at the current market price. This quoted close price keeps updates every second with new prices, so you can keep it open and let prices move to where you want before you press bar.
In contrast to market orders stand the pending order, the order you want to be filled at a specified price, forward or backward from your intended direction. There are two types of pending orders: Stop Orders and Limit Orders.
Pending stop or limit orders which come in the form of entries are called pending stop entry order or pending stop limit order. Stop entry orders are orders to be filled forward of your intended price direction (to confirm price direction), and limit entry orders are orders to be filled backward in temporary retracement of your intended price direction (to enter at better price).
Stop and Limit Orders can come in the form as exits as well. The common exit, Stop Loss, is a pending stop order, while Take Profit is a pending limit order. We will examine these after covering the pending entry orders.
Stop Entry Orders
A stop order is an order to buy or sell a currency when its price surpasses a particular point, in order to ensure a greater probability of achieving a predetermined entry or exit price. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.
- A buy-stop order is a pending buy order to buy the currency pair at a specified higher price.
- A sell-stop order is a pending sell order to sell the currency pair at a specified lower price.
Below is an example of a buy stop order being entered in MT4:
This example in the Type field is indicating that it is a Pending Order, instead of an Instant Execution, and now there are field parameters for the Pending Order, such as Type (for example the indicated Buy Stop), at price (in this example set to 1.2838), and expiry (it is handy to use if you don’t want to have a buy stop last forever). In the tick chart to the left, the designated buy stop entry point appears as a grey line 10 pips above the current bid (blue) quote price. The market reaches up to that price you are filled with 0.01 micro lots.
Stop orders are a good method to use for trading breakouts. For instance, using the example above, the EURUSD buy stop order is placed at 1.2838, just above the last high of the market because if it breaks this resistance level, it can continue to trade higher, and you want to be in on this trade at the breaking point.
Pros of Stop Entry Orders:
- Making sure you are in on the trade when it is moving in your anticipated direction
- Good for catching breakouts
Cons of Stop Entry Orders:
- Because the market has to move a ways up or down before you enter the position, there is the risk of you entering at the end of a run or exhaustion point
- There are a number of traders who like to fade breakouts, meaning that they put limit orders in the opposite direction to your stop orders, hoping the resistance and support holds instead of breaks
Limit Entry Orders
A limit order is placed when you are only willing to enter a new position or to exit a current position at a specific price or better. The limit order, resting below the market for a buy, or above for a sell, will only be filled if the market trades at that price or better. Most pending entry orders are opened via the order window in a 5 step process:
- Open New Order window
- Select Type: Pending Order
- Select Type: Buy Limit, Sell Limit, Buy Stop, Sell Stop
- Select Specific Price
- Place Order
- A limit-buy order is a pending order to buy the currency pair at a specified lower price.
- A limit-sell order is a pending order to sell the currency pair at a specified higher price.
Below is an example of a limit-buy order in MT4:
Buy Limit order is set at 1.2858, 7 pips below the current market buy price of 1.2866. I hope the market creeps a little down before I am filled in order to get a 7 pip advantage on the upward move. If I wanted to short the trade, I could have sell limit set anywhere above the quoted sell price to take advantage of a better price on a downward move.
Pros of Limit Entry Orders:
- Good for getting filled at better prices than market or stop orders.
- Good for fading the breakouts
Cons of Limit Entry Orders:
- Missed opportunity: Sometimes the price does not reach up or down to your limit order, and you miss the ride when the market travels strongly in favor of your intended direction.
- Putting your sell or buy limit at a level of resistance or support can meet with problems when those levels break. You would thus be entering in a position when market trend is moving against you.
Standard Exits: Stop Loss and Take Profit
The stop loss and take profit are the two most common forms of pending exits and they are usually built into most trading platforms as customizable inputs.
Unfortunately, the order window box of MT4 displays stop loss and take profit as customizable price levels (not pips). Even when you want to modify an existing sl or tp, it has to be done by price (not pips). Moreover, it takes at least a few steps to enter and modify sl and tp, which can be seconds too slow in a fast moving market.
Stop Loss: Using stop orders for exiting trades
Stop orders are commonly used to limit losses. One of the most effective ways of limiting your losses is through a pre-determined stop order, commonly called a stop-loss.
Below is an example of a buy stop order being used in conjunction with a stop loss.
As you can see, there is a Buy Stop Order at the price of 1.2837, just above the last high, and it appears as a grey line on the tick chart, 4 pips above the current buy price. There is also a stop loss of 1.2827, which appears as a red line on the tick chart, 10 pips below the buy stop order. Thus, if the market moves up and fills me at 1.2837, my stop loss will be active at 1.2827, and I will not lose more than 10 pips on that trade.
If your trade becomes profitable by a certain number of pips, it is generally a good idea to move your stop loss in the profitable direction in order to protect some of your profit. On a profitable long position, you can move your stop to the breakeven or profit zone, in order to safeguard it against the chance of a market reversal against your currently profitable position.
Determining the profit threshold for when you should move your stop loss to protect your position or profit is the tricky part, because you also want to allow your trade to have room to breathe, to be free to fly instead of prematurely exiting on an insignificant correction.
Take Profit: Limit Orders for Exiting Trades
Just as it is a good idea to have a stop loss order in place before placing your trade, it is an equally good idea to have a profit target in place. A limit order allows you to exit the market at your pre-set profit objective, called a Take Profit.
As you can see, there is a Buy Limit order set at the price of 1.2873, appearing as a grey line (with Entry on it) 3 pips below the current buy quote. Predefined Stop Loss of 1.2871, appearing as a red line (with SL on it), 2 pips below the intended entry, and a Take profit of 1.2878, appearing as a blue line (with TP on it). Of course, one would not likely have the entry limit, stops and targets set so close together, we have crowed them in order to show you how they would appear on the tick chart.
Adding or modifying a stop loss or take profit in MT4 can take a few steps and seconds. Moreover, all modifications are done from price alone, which can add to the delay as one tries to scroll to the specific price.
Once you know the different types of orders (market, stop, limit), and become comfortable using them, you can better fulfill your intentions of how to best enter and exit the trade. There are pros and cons to each order type and these can only be learned through practice.
Knowing the order type is only the how, it does not help with the where and when – which would be up to your analysis or strategy to determine. In the end, you might prefer one type of execution over the others, or you might employ a flexible combination of order types relative to the market conditions.