Order Types – Stop Loss – Slippage
There are several types of trading orders you can send to your Forex brokerage through a client terminal, (trading platform). In this example Metatrader is used:
- Market Order
- Pending Order
- Stop Loss Order
- Take Profit Order
If you want to make a quick Forex market entry and you’re not picky about the price you get, a Market Order can be the way to go. When you pick the Market Order option in the terminal you’re then making a commitment to your Broker to Buy/Sell a currency pair at the current price available in the market, when the order has been sent.
When you Buy a pair, the Broker’s ASK price (right side of the currency quote) is used and when you Sell a pair, the order will be executed at the BID price (left side of the quote). With this type of order, be aware that you don’t necessarily get a fill at exactly the price you saw in your trading platform when you clicked the Buy or Sell button. In a fast moving market, the difference in the quoted price and the actual order fill can be significant.
All charts used in this post are courtesy MetaQuotes Software Corp
Limit Order vs Market Order
If you want to Buy/Sell a currency pair but at a better price than what a Market Order can offer, then a Limit (Pending) Order can be used. To elaborate, let’s say you’re bullish on the EURUSD pair long term and want to open a position which you plan to stay in for the long term but you want to make an entry at the best price possible, in an attempt to milk out a few more pips from this position.
Luckily, you’re not in a rush and you expect a short term dip in this pair, so in case you’re away from the computer, you can use a Limit Order to take advantage of a better price coming your way soon.
Basically, with this type of order you’re making a commitment to your broker to Buy or Sell a currency pair at a price level you have set for the future. The order will be automatically executed once you’re pre-defined price level is reached. Stop Loss and Take Profit Orders can also be sent along with the Limit Order, which will be automatically connected once the Limit Order has been executed.
Btw, these various orders will show up visually on the chart as lines & arrows when a position is open. By hovering the mouse over these lines & arrows, info boxes will pop up and certain actions can be done by right clicking the same, i.e. adjusting the Stop Loss order, closing the position etc.
Below are the 4 types of Limit Orders available, it can take some time before these types of orders are filled, if at all. This happens when price fails to reach the pre-defined level you have set in the order. In this case the trader may have to adjust the order closer to the market, to get a fill.
– Buy Limit
– Buy Stop
– Sell Limit
– Sell Stop
Buy Limit Order
This order is used for Long (Buy) positions, when the current price is higher than the level you plan to make a buy entry at. The order is executed when the future ASK price is equal to the price level you have set in the order.
For example, it’s the correct order to use when trying to buy an expected price pull-back in a currency pair, when you think the overall trend is positive for the pair and want to go Long at the best price possible.
Buy Stop Order
This order is used for Long (Buy) positions, when the current price is lower than the level you plan to make a buy entry at. The order is executed when the future ASK price is equal to the price level you have set in the order.
For example, it’s the correct order to use when trying to enter a positive trend, when you have more proof of it’s likely continuation to the upside, i.e. a price break of a recent high. A Buy Stop can be placed right above this high, to get onboard the positive trend, even if you’re away from the computer.
Sell Limit Order
This order is used for Short (Sell) positions, when the current price is lower than the level you plan to make a sell entry at. The order is executed when the future BID price is equal to the price level you have set in the order.
For example, it’s the correct order to use when trying to sell an expected price bounce in a currency pair, when you think the overall trend is negative for the pair and want to go Short at the best price possible.
Sell Stop Order
This order is used for Short (Sell) positions, when the current price is higher than the level you plan to make a sell entry at. The order is executed when the future BID price is equal to the price level you have set in the order.
For example, it’s the correct order to use when trying to enter a negative trend, when you have more proof of it’s likely continuation to the downside, i.e. a price break of a recent low. A Sell Stop can be placed right below this low, to get onboard the bearish trend, even if you’re away from the computer.
The terminal usually requires that the price you have set for these order types must differ from a Market Order with a certain minimum of pips, before a position is opened. These kind of alerts can show up in the ordering process.
Chart courtesy MetaQuotes Software Corp
Stop Loss Order
This order is used when the trader wants to protect positions from too big losses, in case prices moves against the anticipated direction and the position starts to be unprofitable. The order will close the open position automatically when the Stop Loss level is reached. It can only be placed in connection with a Market or Limit Order.
If the trader has opened a Long (Buy) position, the Stop Loss order will be placed below the BID price. If the trader has opened a Short (Sell) position, the Stop Loss order will be placed above the ASK price. Because of this, the currency pair’s Spread should be taken into account (add it) when placing the order, to avoid a premature (too early) Stop Out of the position.
A Stop Loss order which automatically follows behind price is called a Trailing Stop Loss Order , an useful option available when a trader i.e. wants to get the most out of say a sharp rising trend and for some reason can’t stay glued to the screen all the time.
The Trailing Stop option can be found when you right click the Stop Loss line, when a position is open on the chart. To find the Stop Loss line, look to the left of the chart where an order number and the letters ‘sl’ should be found. One can also hover the mouse over the line and an info box should pop up. When the correct line is found, right click it, to get the menu box.
Nb. Trailing Stop works in the client terminal only, not on the server side (like TP and SL) so the terminal must be on for this Trailing option to work out, only the Stop Loss level will work, set by the TS.
In a volatile currency pair, for example caused by a news release which has a strong impact on the pair, a so called ‘Slippage’ can occur, where a Stop Loss or Limit order is filled at a worse price than what the trader set in the order. Prices can move so fast in such cases that executing an order at a certain price is not possible for the Broker, instead going for the next best available price.
This is one reason trading around 30 minutes on each side of a powerful news release (1 hour time frame) i.e. like the well known Non Farm Payroll, is not recommended. So how do we know if a news event will have an impact on the market? Well, the effect of a news release caused by i.e. natural disasters would be difficult to predict and also when it will occur of course.
However, for economic data & indicators related news releases, there are websites out there like http://www.investing.com/economic-calendar which gives a daily overview of upcoming news releases and also with a grading of expected impact on the markets.
Another reason trading around news time is not recommened, especially for less experienced traders, is that the volatility and unpredictable price behavior can easily stop the trader out of positions on both sides and often with very bad fills (Slippage).
Some Brokers (Forex Spread Betting included) offers GSL – Guaranteed Stop Loss but the backside of it is that it usually comes with a much bigger Spread, which could actually drain the trading account quicker over time, compared to using normal stops. Professional traders hardly ever use GSL.
Take Profit Order
A Take Profit Order can be used when you plan to close a profitable position at a certain level. This is especially great when you must be away from the computer and your planned take profit level has not yet been reached. A TPO is always connected to a Pending Order or an Open Position. This order type will automatically close your position at the take profit level you have set. These orders can only be opened along with a Market or Pending order.
In Long (Buy) positions the BID price is used when a take profit level has been hit (the order is always set above the current BID price. In Short (Sell) positions the ASK price is used when a take profit level has been hit (the order is always set below the current ASK price.
For more in depth information on Orders, how to Open Positions, Stop Loss etc. click the ‘Help’ button on the Metatrader Menu, then ‘Help Topics’ and scroll down to the ‘Trading’ folder and expand it.
Stop Loss Calculator