Types of Orders: Perfect Entry and Limited Loss
Time is crucial for traders. Imagine you analyze the market but don’t see a perfect entry point to open a position now. What should you do? Enter the market with a high risk of loss? Wait until the market reaches a better point? In both cases, you either waste money or your time. That’s why different types of orders were created. Let’s learn how they can help you trade in the market.
What Orders Are and Why Use Them
Simply stated, an order is an act of buying or selling a security. You all know the phrase “place an order,” which means to make an action with security in the market.
If you trade on Forex, you do it through a broker. Thus, to place an order means to give special commands to your broker via a trading terminal. You can either place an order right away or wait for better conditions. Here, different types of orders appear.
To place an order means to give special commands to your broker via a trading terminal.
However, the order doesn’t only relate to the opening of a position. Through an order, you can exit the market or limit your losses if your trade moves in the opposite direction you expected. Let’s consider each possible type of order.
We will start with the main order type classification. In the picture below, you see that there are two primary groups: market and pending orders.
Marker order is the most frequent order type that you have already used if you tried opening a position. This type includes buy and sell commands. The market order occurs when you open a position at a current market price, whatever it is.
Market orders are immediate orders.
At the same time, if you ever opened a trade, you saw that the price at which you opened differed from the one at which you intended to open your trade. This happens because a broker takes a commission or so-called spread. Thus, if you buy, the price at which your trade was opened will be higher than the market price. If you sell a security, your trade will be executed at a lower price.
Moreover, there is a risk that if you trade a highly volatile security, even a second between the moment when you place an order and the moment when a broker executes the order, may cost you more than you expect. Market orders are correlated with the slippage. Slippage is the difference between the willing price and price at which your trade was executed.
Why do traders use market orders? There is the risk of an unfavorable price when placing a market order, but traders use them if they want their positions to be executed as soon as possible. Usually, scalpers and day traders use market orders. They monitor the market through the day and pick out the best entry points. The speed of the order is a part of their successful strategy.
The next type is pending orders. This type is absolutely opposite to a market order:
- The first and primary difference is that the order isn't executed immediately when you place it. It allows you to choose the perfect moment in the future when the selected security should be sold or bought.
- The second difference is that the order is executed at an exact price. Thus, there is no difference between the rate at which you place an order and where the order is executed.
- The third difference is not so noticeable but is crucial for busy investors. Pending orders allow you to choose the perfect entry point in advance. Therefore, you don’t have to constantly monitor the market.
- The last difference is that the order is executed automatically as soon as the price touches the selected price point.
Pending orders allow you to choose the perfect moment in the future when the selected asset should be sold or bought.
Pending orders are also used to buy and sell a security, but it's important to mention that there are four specific types. The picture below will help you to understand the difference.
|Type of Pending Order||Explanation|
|Buy Stop||If you think that the price will keep rising, you should place a buy stop order. The order is set above the current price.|
|Sell Stop||If you believe the downtrend will prevail, you should place a sell stop order. It’s located below the current price.|
|Buy Limit||If, according to your forecast, the price should first decline and then rebound from a certain level and move up, you place a buy limit order. The order will be located below the current price.|
|Sell Limit||If you see that the market is going to move up and then pullback to the downside, you should place a sell limit order. The order will be above the current price.|
A pending order is an excellent option if the current market conditions don’t satisfy your trading strategy. Imagine you don’t have time to sit in front of the monitor the whole day, but you believe that if the price matches several steps of your strategy, the perfect entry point will occur. Even if a pending order is not suitable for intraday traders as they aim to play on fast market fluctuations, pending orders can become great assistance for longer-term trades.
A stop-limit order is another type you should be aware of. As you can understand from the name, it is similar to both limit and stop orders. When security comes to the stop price, a limit order is automatically triggered, and the asset is bought or sold at a target price.
Stop-limit order relates to both limit and stop orders.
If it sounds a little bit complicated, let’s look at an example. Imagine you buy Amazon stocks. The current price is $2,900. However, you want to buy them only if the uptrend is strong. In such a case, you set a stop-limit order to buy at the stop price of $3,000 and the limit price at $3,050. So, if the price breaks above $3000, the order becomes a limit order. As long as the price is below $3,050, the order can be executed. If the price moves above $3,050, the order won’t be completed.
A disadvantage of the stop-limit order is that there is no guarantee it will be executed. But why do traders use stop-limit orders? Stop-limit orders give control over trades. This type of order is mostly used to either limit losses or to fix any profits that potentially arise.
Other Order Types
As mentioned above, there are other types of orders that aren't meant for opening a position. They are stop loss and take profit orders. Some traders forget about them when trading. Nevertheless, they are important concepts you should know about to limit losses and exit the market at the best point.
Take profit is the level at which you would like to close your position. It’s fulfilled automatically as soon as the price reaches it. After that, your trade is closed. While market and pending orders are essential to place a position, a take profit order isn’t obligated.
Take profit is the level at which you would like to close your position.
Although a take profit order can limit your potential profits, we recommend using it. Of course, if you plan to monitor your trade until it reaches a desirable point, you can avoid a take profit order. However, if there is a chance you will miss the moment when the trade turns against you, it’s better to place it.
Some traders also forget about stop loss orders. Stop loss is a level at which your trade is closed automatically if the price moves against your prediction. The stop loss order is even more critical than the take profit one.
Stop loss is a level at which your trade is closed if the price moves against your prediction.
This type also has limitations. If you trade in a highly volatile market, a small stop loss order can close your trade at an unfavorable price. After the market may turn around and your prediction can be right. Thus, if you don’t fear highly volatile trades, you better either place a significant stop loss or don’t place it at all.
How to Place Trading Orders: MT4 Guideline
No matter what kind of order you choose, it is placed with several simple steps.
Step 1. Open a security you want to trade. We choose the EUR/USD pair. Click “New Order.”
Step 2. Pay attention to the “Type” window. Here you will find Market Execution and Pending Order.
Step 3. Market Execution order is set by default. Thus, to place a market order, it’s enough to click sell or buy, and the order will be filled immediately.
Step 4. Here, you also see take profit and stop loss windows, where you can type the levels, you have chosen.
The process is almost the same.
Step 1. Open the security you want to trade. For instance, the EUR/USD pair. Choose “New Order.”
Step 2. In the “Type” window, select “Pending Order”.
Step 3. A new “Type” window will appear. Here, you will need to choose the type of pending order.
Step 4. Type the level at which you want the trade to be executed.
Step 5. Click “Place.” “Stop Loss” and “Take Profit” levels are also available here.
There are different types of orders you can use to enter or exit the market and limit your losses. Two major types are market and pending orders. If you want the trade to be executed immediately, choose market orders. If you see a better opportunity in the future, pick pending orders. Also, you should keep in mind take profit and stop loss levels. Take profit will help you exit the market with profits and stop loss level will limit your losses.
If you still confuse what type of orders you should choose, you can practice on a free Libertex demo account. The demo account emulates the real market conditions so that you can understand what it will be like. This way, you will improve your skills quickly.
Why to trade with Libertex?
- access to a demo account free of charge
- technical assistance to the operator 5 days a week, 24 hours a day
- leverage up to 1:500 for professional clients
- operate on a platform for any device : Libertex and Metatrader 4 and 5
- no commissions for extractions in Latin America
Let’s answer the most frequently asked questions.
What Is a Trade Order?
A trade order is a command to a broker to execute the trade at a certain level.
Which Order Type Is the Best?
There is no best type. The order type depends on your goals. If you need the trade to be triggered immediately, choose the market execution order. If you see a better option in the future, pick pending orders.
What Is the Difference Between Market Order and Limit Order?
A market order executes the trade immediately. A limit order is used to fill the trade only if the target level is reached.
What Is the Difference Between Trade and Order?
These terms are interconnected. If you want to place a trade, you need to choose one of the order types.