The Foreign Exchange market is a huge auction place for currencies, people buy and sell currencies at a price where they think is reasonable for the current time period. Supply and demand for these asset types is what drives their price. Huge volume traders such as banks are sometimes hesitant to buy a certain currency at the current price. To maximize their profits they wait until their desired price is met before entering or closing a position. Forex brokers do provide their clients the flexibility to enter or exit a position when their prices are met.
This order type is an instant trade execution. You acquire or get rid of a currency at the current market price.
Limit order is a command to buy or sell a currency at a pre-set price. This is useful when time is a little short on your side and you can’t stay in front of your trading desk until the price of the currency is met.
- Limit order on long positions
requires you to set your desired entry at or below the current market price.
- When your desired price is above the current market rate, use stop limit order.
- When shorting a currency
pair and the current market price is above your desired entry, use limit.
- If the current market price is below your desired entry point, use stop limit order.
As the term implies this prevents losses from crossing beyond your desired level. The broker closes your position automatically when your exit price is met. This command is a protective barrier used on an open position especially when the position is for a longer time frame where you can't always be monitoring its price.
One Cancels Other (OCO)
This command is a combination
of two set orders but only one would be executed when met and the other one
will be cancelled. This technique can be used as insurance when your plan A
to go long didn’t happen but instead the price of the currency dropped
triggering your plan B order to go short instead. It can also be used to place
two buy or two sell orders. For example, when the current market price of the
USD/JPY is at 115.50 and you plan on placing a long position just below the
current market price. Your first and primary order is a limit to go long on
USD/JPY at 115.20 and your second order is a stop limit ahead of the current
market price at 115.60. Sometimes the currency pair doesn’t bounce back
to its resistance level and just shoots higher. When this happens your original entry point would
not be met at 115.20 but instead it will hit your second order which is at 115.60,
this would automatically cancel your primary order at 115.20 since the position
has already been established.
If then OCO
This command executes a planned entry point and then closes the position when entries stated on the OCO are met. For example you’re planning on going long GBP/USD at 1.9080, the current market price for GBP/USD is 1.9115. First you would place a buy limit order at 1.9080 and then you would place your exit strategy on the OCO. Your plan is to take profit at 1.9200 with a stop loss at 1.9020 and then you go to sleep and dream about a shiny new Lamborghini. The next day, there are 4 possible things that could happen.
1. Your entry point is not
triggered leaving the order still open.
2. You have an open position that is hovering between your limit and stop loss.
3. Your entry price is met but your stop loss was hit resulting to a limited loss.
4. You’re happy because your limit has been met resulting to huge profits.