Orders in forex trading

There are several main types in the Forex market. Here they are.

Limit Order

An order to buy or sell currency at a certain limit is called Limit Order. When you buy, your order is carried out when the market reached down your limit order price. When you sell, your order is carried out when the market reaches up your limit order price. You can use it to buy currency below the market price or sell currency above the market price. There's no decrease with limit orders.

Market Order

The second one is Market Order. It's an order to buy or sell at the running market price. Market orders should be used very carefully as in fast-changing markets there's sometimes a disparity between the price when the market order is given and the actual price of the deal. This occurs because of market decrease. It can lead to a loss or gain of several pips. Market orders can be used to enter or exit a trade.

One Cancels the Other (OCO)

One Cancels the Other (OCO) order is used in case if one simultaneously places a limit order and a stop-loss order. If either order is carried out the other is abrogated which lets the broker to make a deal without supervising the market. Once the market reaches up the level of the limit order, the currency is sold at a profit but when he market falls, the stop-loss order is used.

Stop Order

The last one is Stop Order which is an order to buy above the market or to sell below the market. It's usually used as a stop-loss order to diminish losses if the market behaves opposite to what the broker supposed. A stop-loss order lets sell the currency if the market goes below the point appointed by the broker. In Forex market there are four various types of stop-orders.

1. Chart Stop order

Chart Stop order is a technical analysis that lets elaborate many possible stops caused by the price charts' action or by different technical indicator signs. The swing high/low point is often used as an example of a chart stop is like. In Figure a broker with our suppositional $10,000 account dealing with the chart stop can sell one mini lot at the risk of 150 points, or approximately 1.5% of the account.

2. Volatility Stop order

Another type of the chart stop is Volatility Stop order; it uses volatility instead of price action to fix risk parameters. The sense of it is that when prices strongly fluctuate, the broker has to adapt to the current conditions and let the position more space for risk to avoid being stopped out by intra-market noise, so it's a situation of high inconstancy. On the contrary, can be a situation of a low inconstancy, in which risk parameters would need to decrease.

The volatility stop also lets the broker use a scale-in approach to get a better "blended" price and a faster breakeven point in this following Figure. The joint risk position exposure shouldn't be more than 2% of the account; so it is extremely important that the broker uses smaller lots to properly size his or her joint risk in the trade.

3. Equity Stop order

Equity Stop order is definitely the easiest of the four stops orders. The risk is only with the predetermined amount of one's account on a single trade. On a suppositional $10,000 trading account, a broker risks $300 which is approximately about 300 points, on one mini lot (10,000 units) of EUR/USD, or only 30 points on any dealt. Sometimes brave traders choose to use 5% equity stops. However, it's important to realize that this sum is an the upper limit of reasonable money management as ten consecutive wrong trades would decrease the account by 50%. However, the equity stop order puts an arbitrary exit point on a trader's position - and this is its only but a great weak point. The trade is sometimes abolished to meet the trader's internal risk controls and not because of a logical response to the price operation of the marketplace.

4. Margin Stop order

And finally, Margin Stop order can serve as an effective method in Forex market, if te broker uses it prudently though it is used less than other money management strategies. Forex markets function uninterruptedly that's why Forex players can wind up their customer positions immediately when they trigger a margin call. That's why Forex customers are seldom in danger of generating a negative balance in their account as computers are supposed to close out all positions.

According to this strategy the trader should divide the money into ten identical parts. So if the capital is $10,000 the broker would open the account with a Forex dealer but only send $1,000 instead of $10,000 and leave $9,000 in the bank. Many Forex market traders offer 100:1 leverage, so a $1,000 deposit would give the trader the opportunity to take control of one standard 100,000-unit lot. $1,000 is the minimum that the dealer requires and even a 1 point move against the trader would cause a margin call.

Sometimes the trader decides to trade a 50,000-unit lot position which lets him or her to get about 100 points. Just to compare, on a 50,000 lot the dealer needs a $500 margin, so $1,000 - 100-point loss multiplied on a 50,000 lot is $500. Never mind of how much leverage the trader assumed if he's ready to risk or not, this would stop the dealer from blowing up his or her account in just one trade and would let the dealer to take many fluctuations at a supposedly beneficial trap worrying of setting manual stops. This advice may be useful for the dealers who are used to risking a lot but also getting a lot.

Forex is a risky Business

Of course, every investment is risky but the risks of loss in trading off-exchange Forex contracts are even bigger. That's why once you decide to be the player in this market, you'd better realize the risks connected with this product for make suspended decisions before investing.

In Forex you are operating big sums of money, and it's always possible that a trade will turn against you. The Forex trader should know the tools of advantageous and careful trading and minimizing losses. It's possible to minimize the risk but no one can guarantee eliminating it. Off-exchange foreign currency trading is a very risky business and may not be appropriate for all market players. The only funds that can be used for speculating in foreign currency trading, or any kind of highly speculative investments, are funds that represent risk capital - for example, funds you can afford to risk without worsening your financial situation. There are other reasons why Forex trading may or may not be a suitable investment. We describe them below.

The fraud and Scams in Forex market

A few years ago Forex scams were very usual but since then this business has cleaned up. However it's wiser to be cautious and to check broker's background before signing up any documents with him or her. Reliable Forex brokers work with big financial institutions such as banks or insurance enterprises and are always registered with official government agencies. In the US, brokers should be registered with the Commodities Futures Trading Commission or should be a member of the National Futures Association. You can also check their background in your local Consumer Protection Bureau and the Better Business Bureau.

There's risk of losing your whole investment!

You will be asked to deposit an amount of money, called the "security deposit" or "margin", with your Forex dealer in order to buy or sell an off-exchange Forex contract. A small amount of money can let you hold a Forex position many times bigger than the value of your account. This is called "gearing" or "leverage". The smaller the deposits related to the underlying value of the contract are, the greater the leverage turns out to be. If the price moves in an unpreferrable direction, high leverage can bring you large losses compared to your first deposit. That's how a small move against your position may become the reason for a large loss, and even the loss of your entire deposit. If it's pointed in the contract with your dealer, you may also be required to pay extra-losses.

The market sometimes moves against you!

It's impossible to foresee with a 100%-gurantee how exchange rates will move, and the Forex market is quite unsteady. Changes in the foreign exchange rate between the time you place the trade and the time you close it out influences the price of your Forex contract and the future profit and losses related to it.

There is no main marketplace!

The Forex dealer determines the execution price, so you are relying on the dealer's honesty for a fair price. As unlike adjusted futures exchanges, in the retail off-exchange Forex market there is no main marketplace with lo ts of buyers and sellers.

You are relying on the dealer's reputation credit reliability

There's no guarantee for retail off-exchange Forex trades because of a clearing organization. Besides funds deposited for trading Forex contracts are not insured and never get a priority in case of bankruptcy. Even customer funds deposited by a dealer in an FDIC-insured bank account are not protected if the dealer faces bankrupt.

There's a risk of the trading system break down!

Sometimes a part of the system fails if you are using an Internet-based or any electronic system for executing trades. In case if the system fails, it can happen that for some time one is not may able to enter new orders, execute running orders, or alter or cancel orders that were entered before. The result of a system failure may be a loss of orders or order priority.

You can become a fraud victim!

Keep away from investment schemes that promise big profit with little risk. To defend your capital from fraud you should carefully examine the investment offer and go on monitoring any investment you make.

Risks Types

There are risks to Forex trading even if you work with a reliable broker. Transactions are unexpected and are up to unsteady markets and political events. Interest Rate Risk is based on differences between the interest rates in the two countries represented by the currency pair in a Forex quote. Credit Risk is a possibility that one party in a Forex transaction may not honor their indebtness when the deal is closed. This can occur if a bank or financial institution goes bankrupt.

Country Risk is connected with governments that take part in foreign exchange markets by limiting the currency flow. The country risks more risk making transactions with "rare" foreign currencies than with currencies of big countries that let the free trading of their currency.

Exchange Rate Risk depends on the changes in prices of the currency during a trading period. Prices can go down quickly if stop loss orders are not used. There are several ways of minimizing risks. Each dealer should have a trading scheme. For example, one should know when to enter and exit the market, what kind of fluctuations to expect. The main rule which every trader should sticks to "Don't use money that you can't afford to lose". The key to limiting risk is education which is necessary for developing successful strategies.

Every Forex trader should know at least the main things about technical analysis and reading financial charts. He should also know chart movements and indicators and understand the schemes of charts' interpretation.

Stop-Loss Orders

Even the most experienced traders can't foresee with absolute certainty how the market is going to change. Therefore one should use these tools to limit losses during every Forex transaction.

The simplest way of limiting risk is to use stop-loss orders. A stop-loss order consists of instructions how to exit your position if the price comes to a definite point. When one takes a long position and expects the price to go up he or she puts a stop loss order below the current market price. When one takes a short position and expects the price to go down he or she puts a stop loss order over the running market price. Stop loss orders are often used together with limit orders to automatize Forex trading.