Long orders. Short orders. Market orders. Pending orders. Stop loss orders. Take profit orders. The many different order types available in forex trading can be overwhelming and confusing for newbie traders. Luckily, they don’t have to be.
We’ve prepared this easy-to-understand guide to walk beginners through the fundamentals.
The most basic question any trader needs to ask themselves before making a trade is whether they want to go long or short on a given currency pair.
Going Long (Buy): Going long on a currency pair means buying it in the expectation that its value will increase.
Going Short (Sell): Going short or shorting a currency pair means selling it in the expectation that its value will decrease.
Simple enough, right? The next issue a trader needs to concern him or herself with is the difference between market and pending orders.
A market order is the immediate buying or selling of a currency pair, either at the best available price under market execution, or at a specific price under instant execution. When you open a buy order on a pair, you will do so at the going “ask” price, and close at the “bid” price. In the same way, when you open a sell order on a pair you will do so at the “bid” price, and close at the “ask” price.
For example, let us suppose the current ask price of USDCAD is 1.2531 and the current bid price is 1.2529. Buying this pair via a market order means you would get it at 1.2531. Likewise, selling it via market order means you do so at 1.2529.
Pending orders involve setting an automated order in advance to go long (buy) or short (sell) a currency pair if it reaches a certain price in the future. There are multiple types of pending orders, many of which we will explore in a future post. Two of the most common and important, however, are stop loss and take profit orders.
Stop Loss Orders
Stop loss orders automatically close your trade if the price rises (for short positions) or falls (for long positions) past a certain point set by you and are intended to limit your losses. Think of stop loss orders as an insurance policy should a trade not go your way. As an example, let us say you bought several lots of EURUSD via market order at 1.2600 and you set your stop loss levels at 1.2500. The price drops past 1.2500 but, happily, your stop loss order then kicks in, limiting further damage.
Take Profit Orders
Take profit orders automatically close your trade if a price rises (for long positions) or falls (for short positions) beyond a certain predefined price, thus locking in your profit. Let us look at an example of how these work. Say you bought several lots of EURUSD via market order at 1.2500 and set your take profit level at 1.2600. As things turn out, you chose well and the price of currency pair rises to 1.2600. At that point, your take profit order is activated and your position is closed with profit.