Order Types

Basic Order Types
There are some basic order types that all brokers provide and some others that sound weird. The basic ones are:
• 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 1.2140. 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. If you ever shop on Amazon.com, it's (kinda) like using their 1-Click ordering. You like the current price, you click once and it's yours! The only difference is you are buying or selling one currency against another currency instead of buying Britney Spears CDs.
• 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 1.2050. You want to go long if the price reaches 1.2070. You can either sit in front of your monitor and wait for it to hit 1.2070 (at which point you would click a buy market order), or you can set a buy limit order at 1.2070 (then you could walk away from your computer to attend your ballroom dancing class). If the price goes up to 1.2070, 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 1.2230. To limit your maximum loss, you set a stop-loss order at 1.2200. This means if you were dead wrong and EUR/USD drops to 1.2200 instead of moving up, your trading platform would automatically execute a sell order at 1.2200 and close out your position for a 30 pip loss (eww!). Stop-losses are extremely useful if you don't want to sit in front of your monitor all day worried that you will lose all your money. You can simply set a stop-loss order on any open positions so you won't miss your basket weaving class.

Weird Sounding Order Types
• GTC (Good ‘til canceled)
A GTC order remains active in the market until you decide to cancel it. Your broker will not cancel the order at any time. Therefore it's your responsibility to remember that you have the order scheduled.
• GFD (Good for the day)
A GFD order remains active in the market until the end of the trading day. Because foreign exchange is a 24-hour market, this usually means 5pm EST since that that's U.S. markets close, but I’d recommend you double check with your broker.
• 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 1.2040. You want to either buy at 1.2095 over the resistance level in anticipation of a breakout or initiate a selling position if the price falls below 1.1985. The understanding is that if 1.2095 is reached, you will buy order will be triggered and the 1.1985 sell order will be automatically canceled.
Always check with your broker for specific order information and to see if any rollover fees will be applied if a position is held longer than one day. Keeping your ordering rules simple is the best strategy.

Leverage

Leverage is conventionally displayed as a ratio, such 100:1 or 200:1.
Foreign Exchange, often referred to as the "Forex" or "FX" market, is the arena where a nation's currency is exchanged for that of another. Unlike other financial markets, the Forex market has no physical location and central exchange. It operates through a global network of banks, corporations and individuals. Currencies are traded in pairs, for example Euro/US Dollar (EUR/USD) or US Dollar/Yen (USD/JPY).

Three major Forex market trading tools - Day trade, Spot and Forward:

Day trade: Based on the current market price. Daily transactions settlement occurs within one business day.

Spot: The current market price. Spot transactions settlment usually occurs within two business days.

Forward: The pre-specified exchange rate for a foreign exchange contract settlement at an agreed future date, based upon the interest rate differential between the two icluded currencies.

Spot Trading Example



The Spread: The EUR/USD rate is quoted at '1.2500/05'. This quote represents the bid/ask spread for EUR vs USD.

The Ask: The offer rate of 1.2505 is the rate at which you can exchange your USD for EUR or, this means purchasing EUR with USD, or BUY EUR and SELL USD.

The Bid: The bid rate of 1.2500 is the rate at which you can Sell EUR to buy USD.

Going Long: You believe that the Euro will strengthen against the US Dollar, and decide to BUY or 'go long' EUR 500,000 at 1.2505 (ask price).

Opening Buy: Customer buys EUR 500,000 at 1.2505
Quote (bid/ask) 1.2500/05
Buy Price 1.2505
Volume EUR 500,000
Initial margin (Leverage as high as 100:1) EUR 5,000

Later: Your prediction proved to be correct and the Euro appreciates against the US Dollar. The quote on EUR/USD is now 1.2590/95. To close your position, you decide to SELL EUR 500,000 at 1.2590 (bid price).

Closing Sell: Customer sell EUR 500,000 at 1.2590
Quote (bid/offer) 1.2590/95
Sell price 1.2590
Volume EUR 500,000
Profit/loss $ 4,250 profit

Profit/loss Calculation:
Size of trade x (sell price - buy price) = profit & loss USD
500,000 x (1.2590 - 1.2505) = $ 4,250 profit

Or, converting the $ 4,250 back to EUR at a rate of 1.2590:
(Profit/loss : EUR rate) = profit & loss EUR
(4,250 : 1.2590) = EUR 3,375.7 profit

By closing your position you realize a gross profit of EUR 3,375.7.
Had you estimated incorrectly, and sold EUR at 1.2500 and then bought EUR at 1.2595, a loss of $ 4,750 would have been sustained.

What the is a Lot?

Spot Forex is traded in lots. The standard size for a lot is $100,000. There is also a mini lot size and that is $10,000. As you already know, currencies are measured in pips, which is the smallest increment of that currency. To take advantage of these tiny increments, you need to trade large amounts of a particular currency in order to see any significant profit or loss.
Let’s assume we will be using a $100,000 lot size. We will now recalculate some examples to see how it affects the pip value.
USD/JPY at an exchange rate of 119.90
(.01 / 119.80) x $100,000 = $8.34 per pip
USD/CHF at an exchange rate of 1.4555
(.0001 / 1.4555) x $100,000 = $6.87 per pip
In cases where the US Dollar is not quoted first, the formula is slightly different.
EUR/USD at an exchange rate of 1.1930
(.0001 / 1.1930) X EUR 100,000 = EUR 8.38 x 1.1930 = $9.99734 rounded up will be $10 per pip

What the is a Pip?

The most common increment of currencies is the Pip. If the EUR/USD moves from 1.2250 to 1.2251, that is ONE PIP. A pip is the last decimal place of a quotation. The Pip is how you measure your profit or loss.
As each currency has its own value, it is necessary to calculate the value of a pip for that particular currency. In currencies where the US Dollar is quoted first, the calculation would be as follows.
Let’s take USD/JPY rate at 119.80 (notice this currency pair only goes to two decimal places, most of the other currencies have four decimal places)
In the case of USD/JPY, 1 pip would be .01

What the is a Margin Call?

In the event that money in your account falls below margin requirements (usable margin), your broker will close some or all open positions. This prevents your account from falling into a negative balance, even in a highly volatile, fast moving market.
Example #1
Let’s say you open a regular Forex account with $2,000 (not a smart idea). You open 1 lot of the EUR/USD, with a margin requirement of $1000. Usable Margin is the money available to open new positions or sustain trading losses. Since you started with $2,000, your usable margin is $2,000. But when you opened 1 lot, which requires a margin requirement of $1,000, your usable margin is now $1,000.
If your losses exceed your usable margin of $1,000 you will get a margin call.
Example #2
Let’s say you open a regular Forex account with $10,000. You open 1 lot of the EUR/USD, with a margin requirement is $1000. Remember, usable margin is the money you have available to open new positions or sustain trading losses. So prior to opening 1 lot, you have a usable margin of $10,000. After you open the trade, you now have $9,000 usable margin and $1,000 of used margin.
If your losses exceed your usable margin of $9,000, you will get a margin call.
Make sure you know the difference between usable margin and used margin.
If the equity (the value of your account) falls below your usable margin due to trading losses, you will either have to deposit more money or your broker will close your position to limit your risk and his risk. As a result, you can never lose more than you deposit.
If you are going to trade on a margin account, it’s vital that you know what your broker’s policies are on margin accounts.
You should also know that most brokers require a higher margin during the weekends. This may take the form of 1% margin during the week and if you intend to hold the position over the weekend it may rise to 2% or higher.
The topic of margin is a touchy subject and some argue that too much margin is dangerous. It all depends on the individual. The important thing to remember is that you thoroughly understand your broker’s policies regarding margin and that you understand and are comfortable with the risks involved.
Some brokers describe their leveraging in terms of a leverage ratio and other in terms of a margin percentage. The simple relationship between the two terms is:
Leverage = 100 / Margin Percent
Margin Percent = 100 / Leverage

What the heck is Leverage?

You are probably wondering how a small investor like yourself can trade such large amounts of money. Think of your broker as a bank who basically fronts you $100,000 to buy currencies and all he asks from you is that you give him $1,000 as a good faith deposit, which he will hold you for but not necessarily keep. Sounds too good to be true? Well this is how forex trading using leverage works.