Order Types

Market order- a market order is an order to buy or sell at the current market price. For example, EUR/USD is currently trading at 1.4240. If you wanted to buy at this exact price, you would click buy and your trading platform would instantly execute a buy order at that exact price.

Limit order - a limit order is an order placed to buy or sell at a certain price. The order essentially contains two variables, price and duration. For example, EUR/USD is currently trading at 1.4250. You want to go long if the price reaches 1.4270. You can wait for it to hit 1.4270 at which point you would click a buy market order, or you can set a buy limit order at 1.4270. If the price goes up to 1.4270, your trading platform will automatically execute a buy order at that exact price. You specify the price at which you wish to buy/sell a certain currency pair and also specify how long you want the order to remain active (GTC or GFD)

Stop-loss order - a stop-loss order is a limit order linked to an open trade for the purpose of preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order. For example, you went long (buy) EUR/USD at 1.4330. To limit your maximum loss, you set a stop-loss order at 1.4300. This means if you were dead wrong and EUR/USD drops to 1.4300 instead of moving up, your trading platform would automatically execute a sell order at 1.4300 and close out your position for a 30 pip loss.

Hedging: A way of reducing some of the risk involved in holding an open position. There are many different circumstances in which a trader might wish to hedge. When someone mentions hedging, think of risk protection. A hedge is just a way of insuring an investment against risk.

Much of the risk in holding any Forex position is market risk; i.e. if the market falls sharply, your losses may escalate dramatically. So if you have an open Forex position with good prospects but you think the currency pair may reverse against you, you may be well advised to hedge your position

Example To execute a hedge, simply open a position opposite to your current one. If you are long the USD/EUR with 5 standard lots, simply short the USD/EUR with 5 standard lots. Once you have done so, both positions will move equally. As your long position gains a pip, your short position will lose a pip- or vice versa. As a result, the risk of your position is neutralized.

GTF (Good ‘til Friday)
A GTF order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time.

OCO (Order cancels other)
An OCO order is a mixture of two limit and/or stop-loss orders. Two orders with price and duration variables are placed above and below the current price. When one of the orders is executed the other order is canceled. Example: The price of EUR/USD is 1.4140. You want to either buy at 1.4295 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.3985. The understanding is that if 1.4295 is reached, your buy order will be triggered and the 1.3985 sell order will be automatically canceled.

The basic order types (market, stop loss, and limit) are usually all that most traders ever need. Make sure you fully understand and are comfortable with your broker’s order entry system before executing a trade. This is one of the primary reasons FCMs offer a 30-day free demo account. Also, make sure you take the time to feel comfortable with the terminology of the Forex market. If you have a solid foundation of knowledge, you will be much better off communicating with your clients and trading the market.

FX Terminology

Ask:Price at which broker/dealer is willing to sell.  Same as "Offer".

Bid:  Price at which broker/dealer is willing to buy.

Bid/Ask Spread (or "Spread"):The distance, usually in pips, between the Bid and Ask price.  

Cost of Carry (also "Interest" or "Premium"):The cost, often quoted in terms of dollars or pips per day, of holding an open position.

Currency Futures:Futures contracts traded on an exchange, most typically the Chicago Mercantile Exchange ("CME").  Always quoted in terms of the currency value with respect to the US Dollar.  Parameters of the futures contract are standardized by the exchange. 

Drawdown:The magnitude of a decline in account value, either in percentage or dollar terms, as measured from peak to subsequent trough.  For example, if a trader's account increased in value from $10,000 to $20,000, then dropped to $15,000, then increased again to $25,000, that trader would have had a maximum drawdown of $5,000 (incurred when the account declined from $20,000 to $15,000) even though that trader's account was never in a loss position from inception.

Fundamental Analysis:Macro or strategic assessments of where a currency should be trading based on any criteria but the price action itself. These criteria often include the economic condition of the country that the currency represents, monetary policy, and other "fundamental" elements.

Leverage:The amount, expressed as a multiple, by which the notional amount traded exceeds the margin required to trade.  For example, if the notional amount traded (also referred to as "lot size" or "contract value") is $100,000 dollars and the required margin is $1,000, the trader can trade with 100 times leverage ($100,000/$2,000). Alternatively, for a Mini account, if the margin is $50 and the contract size is 10,000 units, then leverage would be at least 200 to 1 (200:1). 

Liquidity:A function of volume and activity in a market.  It is the efficiency and cost effectiveness with which positions can be traded and orders executed.  A more liquid market will provide more frequent price quotes at a smaller bid/ask spread. 

Margin:The amount of funds required in a clients account in order to open a position or to maintain an open position.  For example, 1% margin means that $1,000 of funds on deposit are required for a $100,000 position.

Offer:Price at which broker/dealer is willing to sell.  Same as "Ask".

PIP – Percentage in Point – is the smallest unit of measurement in the Forex market. When buying or selling something, you quote the price in dollars and cents, and the cents extend out to only two decimal places, e.g. $1.30. In the Forex market, most quotes are carried out to four decimal places, e.g. $1.3000. 

Premium (also "Interest" or "Cost of Carry"):The cost, often quoted in terms of dollars or pips per day, of holding an open position. 

Spot Foreign Exchange:Often referred to as the "interbank" market. Refers to currencies traded between two counterparties, often major banks.  Spot Foreign Exchange is generally traded on margin and is the primary market that this website is focused on.  Generally more liquid and widely traded than currency futures, particularly by institutions and professional money managers. 

Technical Analysis: Analysis applied to the price action of the market to develop trading decisions, irrespective of fundamental factors.

Contract/Lot: Contracts are divided into two categories; mini contracts or lots and full size contracts or lots. A mini contract controls 10,000 units of whatever the base currency in the currency pair is. So, for example, if you were to buy one mini contract on the EUR/USD, you would control €10,000 because the Euro is the base currency in the pair. If you were to buy one mini lot on the USD/JPY, you would control $10,000 because the US Dollar is the base currency in the pair. 

A full-size contract controls 100,000 units of whatever the base currency in the currency pair is. As you can see, a full-size contract is ten times larger than a mini contract. Being able to choose between both mini and full-size contracts allows you to tailor your investing to best meet your investment style and strategy.