Order Types

Orders are the instructions that traders give brokers to buy or sell currencies. Those orders are usually issued directly to the forex broker through the trading platform.

Various types of orders are used in forex trading. The forex order types will be familiar to traders experienced in equities or futures trading. Three common types of orders are the Market Order, the Limit Order, and the Stop Order.

The Market Order instructs the broker to buy at the current market rate, and in the electronic age, is carried out with the click of the mouse. In the forex market, this order type is usually executed immediately, at the price displayed in the trading platform at the time the order is placed (at the instant of the mouse click). That ability to place orders instantly is in marked contrast to many other markets, when the actual price at which a market order is executed might differ greatly from the price at the time the order is placed
.
The Limit Order instructs the forex broker to execute a trade to enter a forex trade at a specific price. The trade could be either to buy currency when (if) it reaches a specific price below the present market price, or to sell the currency pair when (if) it reaches a specific price above the present market price.

For example, consider a trader who wants to buy USD/CAD, thinking that it is likely to increase in value. However, the trader believes that the pair will decrease in value slightly below the present market price before climbing. Since the trader wants to take buy at the lowest possible price, he therefore wishes to wait until the pair reaches the lower price before entering into the trade.

Without a limit order, the trader would need to patiently watch the trading platform, waiting for the price to dip to his target entry price, and then placing a market order.
The limit order automates the process. The limit order can be placed, and the trading platform will wait for the price to drop to target price entered by the trader.

A drawback to using a limit order is that it is only effective at the specific price, and not one pip away. However it does mean that a trader does not have to continually monitor the market waiting prices to meet his entry price.

The Stop Order is similar, but opposite to the Limit order. This order type is normally used to exit an existing forex trade by liquidating a position when the market price changes against the expectations (and position) of the trader. The Stop Order is an order to buy above the present market price, or sell below the present market price. This order is normally used to limit losses if the currency pair price changes unfavorably in a forex position. For that reason, it is also known as a stop-loss order.