Below we discuss the main order execution mechanisms commonly used in forex trading.
Trailing Stop Loss
Like the regular stop-loss order, this type of order can be used as a safety net to limit potential losses. A trailing stop is similar to the regular stop loss in that it automatically closes a trade when the market moves against you and hits a pre-set closing price. The difference between both types of stop loss orders lays in the fact that the regular stop loss order is fixed, while the trailing stop loss dynamic. So as long as the market price moves in a favorable direction, the trigger price automatically follows the market price at a distance which can be specified when placing the order. This implicates that when the market moves in your favor your stop-loss trigger price moves lower and lower, therefore keeps reducing the potential loss you risk. Once the trigger price moves past your entry price, partial gains on the position are locked in.
For example, if you hold a long position in EUR/USD at 1.1100, with a trailing stop of 50 pips. This means that your starting trigger price for the stop-loss part of the order is 1.1050. When the market moves up and closes the bar/candle at 1.1200, the trailing stop-loss will be adjusted to 1.1150. Vice versa for short positions.
It is important to realize that your stop will STAY at this new price level. So if in our example after the initial up-move, price moves down to 1.1180, the stop stays at 1.1150 and is not moving back down accordingly. Therefore, your trade will stay open as long as price does not move against you by atleast 50 pips. Once the trigger price has been hit, your trailing stop will be closed via a market order at the best available price.
Instead of using a trailing stop with does it automically, the stop loss can also be manually trailed. Disadvantage of this is that you have to do this every timeframe tick. The advantage of doing it manually is that you can place stops beneath a strategic level, instead of moving it to a fixed distance from market close. Stops placed at key support levels hold more value.
Take Profits Order (TPO)
What stop loss orders do for the downside, take-profit orders (TPO) do for the upside. They are used to lock-in profits automatically. It automatically closes an open order when the market reaches a specified threshold. This means that for a short position the TPO order is placed below market price, and for a long position above market price.
To clarify this with an example, assume a long trade in EUR/USD at 1.1200 and your pre-determined profit target is 1.1500, you can set this in your trading platform using a take-profit order. When the market hits your TPO, the position will be closed at the current market price. Again keep in mind that in a fast moving market, there may be a gap between this rate and the set TPO.
First-in First-out (FIFO)
When in Forex trading there is referred to First-in First-out (FIFO) it is about the order queue structure. As the name implicates, with this structure positions are liquidated in the order in which they were originally opened.
Good Until Canceled (GTC)
Limit orders can be good for specified amount of time or “good till canceled (GTC).” Like the name implicates these GTC limit orders are held open until the trader terminates them manually. For a day- or swing trader it’s not too likely you use GTC orders since you’re not in a trade for the long run. So a GTC order remains active until you cancel it manually. Your broker will not cancel it after a while.
Good For the Day (GFD)
A “Good for the Day (GFD)” is a limit order that is only valid for that trading day. At the end of the trading day the GFD order is invalid. Keep in mind that since forex market is 24-hour the end of the trading day isn’t necessarily a logical time in your time zone. Usually it means 5:00 pm EST since that’s the time when U.S. markets close. Best to double check this with your broker.
One Cancels the Other (OCO)
The so-called One Cancels the Other order, or in short OCO is an interesting one. It is a combination of two limit orders and/or stop-loss orders at opposite ends of the spread. These two orders are placed above and below the current price. When one of the orders gets executed, the other order will automatically be cancelled. This can be interesting for example when you’re trading triangle breakouts.
Let’s clarify this with the following example. Assume USD/JPY is range trading between 108.00 and 110.00. You want to either buy if it breaks support at 108.00 or once it breaks resistance at 110.00. With a OCO order you can easily set a structure like this up, without having to worry about false breakouts eventually also hitting your other trade order.
Instead of the use of a OCO order for opening a new position, it can also be used when you are already in a live trade. When in a long trading position you place your stop-loss orders below the entry price. You can add a OCO order above your entry price to lock in profits once the base currency hits the OCO trigger price. If this happens the position will be automatically sold and the original stop loss cancelled. If the market does not hit the OCO threshold level, but instead hits the stop loss, the positions is liquidated and the OCO order terminated.
Some brokers use different names for these order types.
An other type of order mechanism is the One-Triggers-the-Other or OTO. It’s the opposite of the OCO order and will only put on orders when the parent order is triggered. This type of order is usually used when you want to set profit taking and stop loss levels ahead of time, even before your position is live.
For example, if we consider a short trade in EUR/JPY, currently trading at 121.40. Now assume we believe the market will keep moving up to 122.30 and from there make a pullback into the 121.50 region. Since it’s almost midnight you don’t want to stay up all night seeing this trade idea unfold, you place a OTO order. To make this trade idea come true you place a sell limit around the 122.30 with a stop loss a few pips above that entry level. The second order you place is a buy limit at 121.50 which will only be placed if your initial sell order at 122.30 gets executed.
The rookie and novice forex traders the basic forex order types are usually all you ever need. Only for the true veteran trader it might be beneficial to design a system of trading which requires a large number of forex orders sandwiched in the market at all times.
Best to first get really comfortable with your broker’s order entry system before start trading live. Often brokers offer free demo-accounts where you can learn in a safe environment placing orders and track what happens when they get triggered. To get more information about margin requirement, rollover fees, etc., that come with trading check this post.