Placing The Optimal Orders

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”

-Robert G. Allen

Capturing opportunity in financial markets depends on being at the right place at the right time. Yet, it’s nearly impossible to be everywhere simultaneously. Monitoring every single asset as prices fluctuate throughout the day is also not realistic. However, that does not mean you have to miss out on opportunities. Instead, carefully strategizing how and where you place your orders can unlock the market’s potential without having to be attentive around the clock.

What are the Different Order Types?

Although most beginner investors believe that buying a financial asset is as simple as picking an asset and selecting buy or sell, there is a little more work and caution that should go into the process. It begins by understanding the different order types, and how each can play an advantageous role in your strategy. There are three major order types that investors should be familiar with.

• Market Order: A market order is an order placed by a trader that is designed to be executed instantly at the current or best available market price quoted by the trading platform.
• Limit Orders: A limit order is considered a conditional order that depends on the price of an asset reaching a certain level before the order is triggered and eventually executed. These can be broken down into “Buy Limit” and “Sell Limit” orders. A buy limit order is an order to buy an asset at a price that rests below the current market price. Once that price level is reached, the order is processed and the trade is simultaneously opened. A sell limit order is an order to sell an asset at a price that is above the current market price. Once that higher price is reached, a sell position is opened by the order.
• Stop Orders: Just like a limit order is opened when the price of an asset meets certain conditions set by the order, a stop order is only opened when an asset’s price reaches a certain level. In the case of a buy stop order, the order to buy an asset is placed above the current market price. When the price of an asset rises and triggers the buy stop order, a buy position is opened. Conversely, a sell stop order is opened at a price below the current market price. When the asset’s price falls to that level, the order is executed and the sell position is opened at the predetermined level.

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Limit and stop orders also form the basis for some more advanced order types that are used to manage risk and reward. These include the take-profit order (type of limit order), which automatically closes out an open trade at a profit once it reaches a certain level and stop-loss (type of stop order), which closes out a losing trade at a certain predefined point.

There is also the trailing stop, which is another type of stop order that trails market prices. If a trailing stop is set to close out a buy trade, it will trail behind the market price as an asset’s price rises and be triggered should the asset’s price reverse. Trailing stops can close out trades at either a loss or a profit depending on how it is set.

All the above order types are available in the FXTM ECN Zero account, which features zero commissions for trades. Although stop-loss and take-profit levels must be added after a trade order is already executed, there are other useful features available, like the ability to set a time limit for when an order that hasn’t been executed will expire instead of staying open permanently.

Why Use Different Order Types?

Limit and stop orders are especially useful, and possibly even more valuable that market orders simply because they allow investors to clearly define when and where they plan to get involved in a trade. Even better, they can help investors time trades without having to constantly monitor the market by defining more potential advantageous entry and exit points.

Sometimes the excitement of changing conditions and prices represents an appealing reason to get involved in a trade. However, oftentimes, getting caught up in this excitement can lead to poor decision-making and a rush to get involved instead of carefully planning a trade and preparing for different outcomes.

Instead of rushing to get involved and buying the highs and selling the lows, getting caught on the wrong side of momentum, patiently waiting by setting conditional orders at important price levels can help you manage risk and build more attractive entry and exit strategies.

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