The Basics of the Forex Market – Part 1
So much of the content I’ve written about is directed toward traders with at least some experience, so today we’re going back to basics to go over a few things that less experienced traders should know about, even before finding a trading strategy. Throughout this series we’re going to discuss for topics: Order types, Margin, Leverage, and Lot Size.
The first fundamental we’re going to cover, is order types.
It goes without saying that you can’t learn forex trading without knowing what orders you can place. The basic and most widely available order types are:
- Market Order
- Limit & Stop Orders
- Take Profit Orders
- Stop Loss Orders
Market orders are the most common type of order. With these, you’re buying or selling a currency pair at the available price that the market is currently offering. Say for example the bid price is 1.321 and the ask price is 1.323, if you were to buy, you would be paying 1.323. Conversely, if you were to sell, you would be quoted 1.321. The little gap in these prices is called a spread, and this is difference in price is your broker’s profit.
Limit & Stop Orders
When you place a limit or a stop order, it only activates once certain conditions or criteria in price are met.
For example, a limit order is placed if you wish to buy below the current market price, or sell above the current market price. So if you think price will bounce off a certain level, you could use a limit order that activates as soon as price reaches that area. You’d use these kind of orders to avoid sitting at the screen indefinitely until price reaches the particular area that you wish to buy or sell.
Stop orders are kind of similar, in that you set them ahead of time. Only, with stop orders, you’re buying above, or selling below price… so the opposite. You could say you’re wanting to trade in the direction of the market’s momentum.
Either way, what both of these orders can offer is an opportunity to take some of the emotion out of trading. After your order is set, you can simply walk away and let your trading platform do the rest for you.
Take Profit and Stop Loss Orders
Take profit and stop loss orders simply close out your position once it reaches a predetermined price point. I simple example would be if you placed a buy order 1.323 and the most you’re willing for price to go against you is 30 pips, you’d place a stop loss order at 1.320 which would close your order for a small loss, preventing greater loss if price continued to go against you. Take profit orders are designed to close your trade at a profit, so if you had a target of 30 pips on the same order, you could place your take profit order at 1.326, and it would automatically close your order once price reached 1.326.