Forex Order Types
When you open a trade, you may have other commitments so you cannot spend hours always watching your computer monitor. To get around this, you can set up Forex orders. An order is a request to your broker to buy or sell or to close out your position.
The three most common types of Forex orders are Market Orders, Limit Orders and Stop-Loss Orders.
A Market Order is an order to buy or sell currencies at the current market price. For example, you will normally open a trade by making a market order.
A Limit Order is an order to buy or sell at a certain price. For example, suppose you buy GBP (and sell USD) when the Forex quote: GBP/USD = 1.9710/1.9715 (i.e. you issue a market order.) You could then set up a limit order to sell your GBP, when the Forex quote: GBP/USD = 1.9760/1.9765 (i.e. when the Forex quote has increased by 50 pips). You can also put a time frame on your limit order. For example you can request close the trade at the end of the trading day, whether or not the price has increased by 50 pips (GFD). Or you can request the trade to continue until either the price has increased by 50 pips or you cancel the trade (GTC).
A Stop-Loss order is an order to close the trade, if the market moves against you. Say you buy GBP when the Forex quote: GBP/USD = 1.9710/1.9715. You could make a stop-loss order to close the trade if the Forex quote went below GBP/USD = 1.9690/1.9695. This would limit your losses to 20 pips (plus the bid/ask spread).
An Order Cancels Other (OCO), is a mixture of 2 limit and or stop-loss orders. For example you could set up an OCO to close your position if the Forex quote went below GBP/USD = 1.9690/1.9695, or sell your holding of GBP when the Forex quote: GBP/USD = 1.9760/1.9765.
Good 'Til Cancelled (GTC) - Keep your trade open until you (issue a market order to...) close the trade.
Good For Day (GFD) - Close your position at the end of the trading day 5 PM EST (or 10 PM GMT).
GTC and GFD are usually used in conjunction with limit orders.
Until you have gained some experience, it is best to use just the first three order types: That is, Market, Limit and Stop-Loss orders. It is especially important that you become used to the Stop-Loss order before you start trading for real. Otherwise, if the trade moves against you, you could lose all the money in your account.
Normally, no reputable broker will let you continue to trade if your account goes (or is about to go) negative. Having said that, in volatile markets currency values can change very quickly, so there is a small possibility, that you could lose more than the just the equity in your account. This is only likely however, when you trade with margins that are too small (e.g. less than 1 percent) i.e. too much leverage, and when you do not have sufficient unused margin in your account.
