How to trade forex using order types and expirations
Before beginning your forex trading journey, it is good to learn some of the technical aspects of forex trading.
This article is not designed to outline a trading plan or strategy, it is rather a practical guide to understanding the basics of forex trading and what type of orders you can use. It explains various execution styles and order types we offer.
We want to ensure that you know and understand the various trade and order types available on our MT5 forex trading platform, and most importantly, we hope you find this to be a useful resource now and in the future.
The four different order types and order expirations
We offer four different order types and four different possible order expirations.
The four order types we offer are:
- Instant Execution
- Buy/Sell Limit
- Buy/Sell Stop
- Buy/Sell Stop Limit
The four possible order expirations we offer are:
- GTC (Good ‘til Cancelled)
- Today (also known as GFD – Good for Day)
- Specified (date and exact time)
- Specified Date (close of business on a specified date)
Before we’re getting into the detail of our order types and expirations, it’s important to understand the bid and offer, and how and why they are used.
Here’s an example using GBP/USD:
The bid and offer reflect the best available prices in the markets at the current time.
The best available bid and offer may also be referred to as the touch price, a two-way price or simply ‘the quote.’
The bid reflects the highest price buyers are currently willing to pay, with the offer showing the lowest price sellers are currently willing to sell.
In the example above the bid is 1.3849, and the offer is 1.3851.
You may have also noticed that the bid price has SELL written above, and the offer price shows BUY above the price.
Here’s how to interpret what is shown:
If you want to sell a currency you need to find a buyer, so the bid is the best available price when looking to sell. Remember, the bid reflects the highest price a buyer is currently willing to pay, in our example this would be 1.3849.
The inverse is true with the offer being the lowest a seller is currently willing to sell at, therefore the best price to look for if you were placing a BUY trade.
It is possible to work orders away from the current market price, which we will cover shortly, but for now, we are simply looking for the best available prices for instant execution.
Now that we understand what a bid-offer price (or quote) is, we should look at the order types on offer as a forex account holder.
1. Order type: Instant Execution
As the name suggests this is the execution type used for instant execution and will deal using the best available bid/offer price available at the time of execution.
Let’s use our example quote again:
Let’s say you wanted to buy using the instant execution order type. This means your trade would be executed at 1.3851 – the best (or lowest) available sell price at that time.
So, in this case, you are a buyer looking to meet the best or lowest available seller at that precise moment in time, which in our example is 1.3851.
2. Order type: Limit Buy/Sell with different expirations
A limit is an order that will only get executed at your limit price OR BETTER.
This is a key point with limit orders. You are giving instructions to trade at the stated price (your limit price) or better.
For limit buy orders you will be filled at your limit price or lower (better).
For limit sell orders you will be filled at your limit price or higher (better).
Let’s use our quote again but with some additional market depth information.
Below shows the best bid and offer (red), with sellers at higher prices and buyers further down.
This level of information is known as Level II or market depth. This gives us much more detail to current market conditions with volume at additional price levels.
Now, let’s say you wish to place a limit buy order. You don’t want to pay the best price available (1.3851 – the current lowest seller), instead, you want to pay 1.3847 or better (less).
So, you place a limit to buy 50 GBP/USD @ 1.3847 GTC (‘good till canceled’).
The order book would now look like this:
We have highlighted the volume at your limit price of 1.3847. You will notice that 10 has now become 60 as your 50 GBP order has joined the previous bid(s) at the same level (10 + 50 = 60).
Should the market trade lower you will get filled at that specified level or better, but not sooner.
You may get a partial fill, which means some of your limit order is executed before the market moves back above your limit price, therefore your order stopped participating as the price would be worse than your stated limit price.
If the market doesn’t trade at or below your limit price you will not receive any execution at all, and the order will remain on your account until you decide to cancel it.
Notice the order was GTC – ‘good til canceled’ – meaning you instruct us to work the order until you decide to cancel it.
However, there are other durations available for your order to choose from. You can also select:
Today (sometimes referred to as ‘GFD’ – Good For Day) – which will work the order until today’s close, at which the order (or remainder of your order if partially filled) will be canceled.
Specified – allowing you to work until an exact date and time (useful if you want to cancel before macro releases or central bank announcements).
Specified Day – this will work to a certain date, canceling at the end of the stated date.
3. Order type: Buy/Sell Stop
This order type will become an instant execution order once the stated price is triggered.
Let’s use our quote again, GBP/USD is 1.3849/1.3850 and you enter a stop buy order to buy 5 GBP/USD @ 1.3860.
Once the offer price (buying price) reaches 1.3860 your order will be triggered and become an instant execution order, meaning you will be filled at the best available price.
In most market conditions it will be the same as your trigger price, however, during periods of high volatility, when prices are moving extremely quickly, or during a market gap (over a weekend), it may result in a price different from your stated price.
A buy/sell stop is saying ‘once my trigger price has been hit, fill me at the next available price.’
4. Order type: Buy/Sell Stop Limit
Initially, this order type works the same as a buy/sell stop, but with an attached limit.
Using our example above, GBP/USD is 1.3849/1.3850 and you decide to enter a stop buy order to buy 5 GBP/USD @ 1.3860 with a limit of 1.3865.
This means you are looking to limit the price of your fill following the trigger of your stop. This type of order can seem confusing, but it simply gives you more control over your fill level once your order has been triggered.
A Buy/Sell Stop Limit order can be extremely useful during periods of high volatility or possible weekend gap scenarios.
For example, let's say over a weekend (when markets are closed) there is positive GBP news and GBP/USD jumps to 1.40 on the open Sunday evening.
Your stop level, 1.3860, has been breached and your order is triggered, but the market is now trading above your stated limit price of 1.3865. This additional step would ensure that your order doesn’t participate in the market on the open at 1.40.
Should this market gap scenario occur on your Buy/Stop order (explained above) you would be filled at 1.40, the first available price.
As you can see, we offer our clients a variety of order types and expirations that can help you make the most of your trading strategy.
We hope you found this explainer article useful and will continue to use it as a reference tool until you are comfortable with the order types and expirations on offer.