Using orders to open positions
Trading in financial markets involves buying and selling financial assets, such as stocks, currencies, and commodities, with the aim of making a profit. When trading, you’ll open and close positions using orders. In this article, we’ll discuss the different types of orders available and how to use them to open positions.
What is an order? An order is an instruction to execute a trade. You use them to tell your broker or trading provider when you want to open or close positions. Traditionally, investors gave orders to brokers over the phone. But the rise of web trading means most traders today raise orders using online platforms.
Market orders The most basic type of order is the market order, which tells your provider to execute at the best price available at the time. Market orders are an instruction to execute your trade as close to the current market price as possible. You can use market orders to open or close a position.
Entry orders But what if you didn’t want to trade at the current market price? You might, for example, think that buying a currency pair like EUR/USD is a great opportunity – but only if it drops to a specific price. You could watch the currency pair and open a market order when it hits your desired price. Or, you could use an entry order.
Entry orders automatically open a position when the market hits a pre-determined level set by you. This is particularly useful for traders looking to buy/sell at a specific price and who don’t want or don’t have the time to monitor the markets constantly until this level is reached.
There are four types of entry orders: buy stops, buy limits, sell stops, and sell limits.
Buy stops instruct your broker to open a long position on a market when it hits a specified price above its current price. Buy limits open a long position when the market hits a specified price below its current price. Sell stops open a short position on a market when it hits a specified price below the current one. Sell limits open a short position when the market hits a specified price above the current one.
Stops vs limits You’ll hear the terms stop and limit used a lot when it comes to orders. Stop means an order that will execute at a level that is worse than the current price. Limit means an order that will execute at a level that is more favorable than the current price. ‘Worse’ or ‘more favorable’ doesn’t have to mean ‘below’ or ‘above’, however. Take our buy and sell limit entries above. When you’re going long, a more favorable level to open at is below the current price – you’ll make more profit if you open there. But if you’re going short, it’s above the current price.
Good ’til when? As well as deciding your trade direction, quantity, and level, you can decide how long an entry order will remain active before your provider cancels it. The three options you’ll see on trading platforms are good ’til canceled (GTC), good ’til end of day (GTD), and good ’til time (GTT).
Good ’til canceled (GTC) means your entry order will remain active until you cancel it manually, the market expires, or it is triggered. That could mean it is still active weeks or months after you first place it.
GTD orders, meanwhile, will automatically cancel at the end of the trading day. This is useful if you think that your chosen opportunity won’t last – with a GTD, there’s no risk of you forgetting to cancel and ending up with an unwanted trade.
GTT’s give you maximum flexibility by enabling you to choose the precise time and date that you want your order to remain active until. If the market hits your chosen level in that timeframe.
Placing a stop-loss order While entry orders are used to open positions, stop-loss orders are used to limit potential losses. A stop-loss order is an instruction to automatically close an open position when the market moves against you by a specified amount.
For example, if you buy EUR/USD at 1.0800, you might set a stop-loss order at 1.0775. If the market falls to 1.0775, your broker will automatically close the trade to limit your losses.
Placing a stop-loss order is important for managing risk when trading. It ensures that you don’t lose more than you’re comfortable with, even if the market moves against you.
Trailing stops A trailing stop is a type of stop-loss order that follows the market as it moves in your favor. If the market moves in your favor, the trailing stop will move with it, maintaining the same distance from the current market price.
For example, if you buy EUR/USD at 1.0800 and set a trailing stop of 25 pips, your broker will automatically adjust the stop-loss order as the market moves in your favor. If the market rises to 1.0825, the trailing stop will move up to 1.0800, maintaining the 25-pip distance from the current market price.
Trailing stops are useful for locking in profits while giving your trade room to breathe. They allow you to stay in a winning trade as long as possible while minimizing your potential losses if the market turns against you.
Closing positions To close a position, you can use a market order or a limit order. A market order will close your position at the current market price, while a limit order will close your position at a pre-determined price that you set.
For example, if you buy EUR/USD at 1.0800, you might set a limit order to close the position at 1.0850 to take profits. Alternatively, you might use a market order to close the position if the market moves against you and hits your stop-loss order.
In conclusion, understanding the different types of orders is essential for successful trading. Market orders, entry orders, stop-loss orders, trailing stops, and limit orders all have specific purposes and can be used to manage risk and maximize profits. As you become more experienced with trading, you’ll learn how to use these orders in different situations to achieve your trading goals.