Placing orders with a forex broker is the way you trade foreign currency to make a profit. That sounds simple, and it is. However, forex traders use real money and profits or losses are equally real.
The goal of this article is to provide you with an understanding of forex orders and how to place them so that you maximize the chances of making a profit. You will learn about the mechanics of placing an order, and what happens when you make a trade. In addition, this article provides a detailed description of forex order types and how each is used.
The Nature of the Forex Order: Brokers, Accounts, Markets
Forex traders range from single persons to giant financial institutions. When an individual trades foreign currency, he or she does so by placing an order with a retail forex broker. The broker is simply a firm that provides a trading account where you can buy and sell currency 24 hours a day.
Brokers like TD Ameritrade and Forex.com also provide trading platforms. The trading platform is a software package you use to make trades and analyze current price trends. Alternatively, you can choose other platforms, like MetaTrader 4 or cTrader, which are usually free to use.
Opening a Forex Broker Trading Account
You have to open an account with a forex broker before you can start trading. There are two main types of accounts. A standard account is designed for trading standard lots of currency. A standard lot equals 100,000 units of a currency. For example, you might buy a lot of $100,000 or sell a lot of 100,000 euros.
“Demo” accounts allow beginners to trade much smaller amounts while they gain experience. Some brokers offer accounts that allow you to customize the size of a forex order. You can also find brokers who provide practice accounts that don’t require you to commit real money.
Once you choose the forex broker account type you want, simply complete the required paperwork. The broker will send you an email. This email provides directions for activating and funding the new account. Once these steps are complete, you are ready to place orders with the broker.
The Forex Trade: What Happens When You Place a Forex Order
Placing the forex order is simple. Just click the mouse after entering the necessary information in the trading platform. When you choose to buy a currency, it’s called going long. You make a profit if the currency pair you trade goes up in value. You may also sell a currency, which is called going short. In this case, you make money if the currency decreases in value.
Here’s an example. Suppose you decide to buy Euros with US dollars. The current quote will show like this: EUR/USD 1.4500 The first currency listed (here, the Euro) is the base currency. The price quote means it costs $1.40 to buy one euro. Sine this a buy order, you make money if the value goes up. Let’s say the value goes up to EUR/USD 1.4050. In this case, you make$500.
At some point, you must close out or exit the trade. You do this by placing a sell order if you went long. If you went short, you place a buy order to exit the trade. Sometimes you exit in order to take a profit. In other situations, a trade is closed out in order to limit a loss.
One key feature of forex trading is margin. You do not have to put up $100,000 to trade a single lot of currency. The amount you put up is called the margin. Brokers allow margins of 10:1 to 100:1 in most cases. With a margin ratio of 100:1, you put up just 1 percent, or $1,000.
The small margins mean that even the smallest changes in value can spell the difference between a profit and a loss. Forex traders enter and exit trades several times in a single trading session in an effort to capture gains from fluctuations in currency prices.
Using Forex Order Types to Manage Trades and Limit Risk
Forex trading is fast-paced. Responding quickly to market price movements is crucial to successful trading. Traders use several order types to define orders and how they will be implemented.
Market Orders. A market order is the simplest forex order type. When you place a market order, it automatically executes immediately, whether it is a buy or sell order. Because there is a tiny delay between the time you click your mouse and the time the order executes, the actual price may be slightly different. This is true for all order types. You would use a market order when you think the market is moving in a particular direction.
Limit Orders. To place a limit order, you enter a price above the current market price. The limit order only executes when and if the price reaches the specified level. Traders use limit orders most often with buy orders, but don’t want to enter the trade unless the market is moving up.
Stop Orders. A stop order is just the opposite of a limit order. You enter a price level below the current market price. The order executes only when this price level is reached. Stop orders are usually used for going short, but the trader wants to make sure the market is trending down before the order actually executes.
Stop Loss Orders. A stop loss order is exactly what it says: a tool for limiting losses if the market moves against you. A stop loss order is attached to the market or other order. You specify a price at which the stop-loss order will automatically execute. For example, if you go long, the stop loss would specify a price level below the current market price. If the price falls, the stop loss ensures you exit the trade before your loss becomes excessive.
Profit Target. The profit target, like a stop loss, is attached to a forex order. This profit target specifies a price level that ensures you make a profit. Nonetheless, the same profit target executes when this price level is reached.
Placing an order with a forex broker involves more than simply clicking the mouse. Whether a trade is profitable or not depends on very small price movements. Forex traders use forex order types to reduce the risk of trades and to manage entry and exit from each trade.
Feedback from readers provides a guide for improving articles. You can also let us know what additional information you would like to see presented, and suggest topics for future articles.