The orders that you’ll give most frequently to the broker are the take profit and stop loss orders. As their names suggest, the take profit order tells the broker to liquidate the trade and realize the profits once a certain price level is reached. The Stop-loss order is the opposite. If the unrealized losses in your account reach the instructed level (as determined by the stop-loss order), the broker will liquidate the trade and you will have to bear your losses.
Forex order types can be broken down into the two general categories of limit and market orders. The main distinction between a market order and a limit order is timing: a market order is realized immediately, while a limit order will only be activated if a predetermined price value is reached. Market orders are used to exploit opportunities that arise suddenly, and do not leave enough time to the trader to formulate an exit strategy, or to define the optimal price for entering the trade. The limit order is the choice that we must used most frequently.
A limit buy order, for example, would only be realized if prices reach the value stated by the trader. If we enter a limit buy order at 1.500 for the EURUSD pair, with a stop-loss order at 1.400, and a take profit point at 1.6, the broker would wait until the price hits the 1.5 point, and would keep the trade alive until either of the two limits are reached. In this case, if the stop-loss order is hit at 1.4, we’d have to realize the 100-pip loss incurred, and if the take profit point is touched, we would have made a profit of the same size.
Some brokers also offer a trailing stop-loss order where the stop-loss point adjusts as the trade gains in value. For instance, in the above example, if the trailing stop loss order were to reset at ten pips, our stop-loss order would be reset at every ten pip profit the trade would make.
Guidelines with respect to the use of forex orders are that you should always use a stop-loss order, and always adopt a favorable risk/reward ratio in the initial configuration. For example, if your stop-loss is 10 pips away from the entry point, your take profit should be three-four times farther. If the price action does not justify such a posture, it’s better not to trade. Tampering with the stop-loss order once it is placed is bad practice, but it can be justified if new information becomes available alters the background scenario of the trade drastically (in which case you can also consider liquidating the position and accept the losses).
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