Advanced order types are basic but vital tools that should be considered when executing against a trading strategy. Each Order Types has its own advantages; however, they generally help protect profits and limit downside risk.Understanding the differences and benefits of each order type is essential to help you determine which order type will help you reach your goals.
There are 3 main Order Types:
Market Orders
The most basic type of order is a Market Order (also known as a Spot Transaction). A Market Order is an order to buy or sell to be executed immediately at the current market price. As long as there is liquidity, market orders are almost always filled.
Benefits
Market Orders are useful when certainty of execution is a priority over the price of execution.
Limit Orders
What is a Limit Order? A Limit Order is an order to buy or sell currency at a specific rate or better. A Buy Limit Order can be executed at the limit price or lower, and a Sell Limit Order can be executed at the limit price or higher. Benefit They have the advantage of being able to specify a precise execution price.
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Set Buy Limit below current market rate because you believe the market will go down to your limit price. |
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Set Sell Limit above current market rate because you believe the market will go up to your limit price. |
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A limit order is NOT guaranteed to execute. |
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Stop Order
What is a Stop Order? A Stop Order is also referred to as a Stop-Loss Order. It is an order to buy or sell currency once the price of that currency reaches a specified level called the stop price. A Buy Stop Order is placed above the market and a Sell Stop Order below the market. Benefit They are used to protect a profit or loss. |
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Set Buy Stop above current market rate to set the maximum rate you are willing to pay. |
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Set Sell Stop below current market rate to set the minimum rate you want to sell at. |
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A stop order is NOT guaranteed to execute. |
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Expirations of Orders
Market Orders are executed immediately at the current market price so this order type will not expire. Limit Orders and Stop Orders however, have an expiry value of Good till date (GTD) or Good till Cancelled (GTC).
Orders and Hedging
Advanced orders can be combined with other foreign exchange products to create powerful hedging tools. A Limit or Stop Order can be combined with a Forward Contract to lock in desired rates for the future. These can be used to protect profits and limit upside costs if the currency will not be required until a later date.
The Bottom Line
Advanced Order Types are powerful tools to use to protect your profits and limit downside risk and are especially useful when trading volatile and trending currency pairs.
Speak with one of Account Managers to see if Advanced Order Types can be beneficial to your FX strategy. Book a free, no obligation consultation today!
