For some traders you may hear the terms trailing stop loss and stop loss order and
wonder exactly what these are and how a stop loss can enhance a trading
strategy.
Let’s start with the basics, defining a stop loss order and other types of orders.
-Order Types-
Market Order is an order to buy or sell at the best available price.
For Example: The bid price for EUR/USD is currently at 1.2140 and the
ask price is at 1.2142. If you wanted to buy EUR/USD at market, then it
would be sold to you at the ask price of 1.2142. You would click buy
and your trading platform would instantly execute a buy order at that
exact price.
Limit Entry Order is an order placed to either buy below the market or sell above the market at a certain price.
If the price goes up to 1.2070, your trading platform will automatically execute a sell order at the best available price.You use this type of entry order when you believe price will reverse upon hitting the price you specified.
Stop-Entry Order is an order placed to buy above the market or sell below the market at a certain price.
Stop-Loss Order is a type of order linked to a trade for the
purpose of preventing additional losses if price goes against you. REMEMBER THIS TYPE OF ORDER. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order.
Stop-losses are extremely useful if you do not want to sit in front of your monitor all day worried that you will lose all your money.
Trailing Stop is a type of stop-loss order attached to a trade that moves as price fluctuates.
Just remember though, that your stop will STAY at this price. It will not widen if price goes against you.
Going back to the example, with a trailing stop of 20 pips, if USD/JPY hits 90.50, then your stop would move to 90.70. However, if price were to suddenly move up to 90.60, your stop would remain at 90.70.
Your trade will remain open as long as price does not move against you by 20 pips. Once price hits your trailing stop, a stop-loss order will be triggered and your position will be closed.
-Other Terms-
Good 'Till Cancelled (GTC) an 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.
Good for the Day (GFD) an order remains active in the market until the end of the trading
day. Because foreign exchange is a 24-hour market, this usually means
5:00 pm EST since that is the time U.S. markets close, but we'd recommend you double check with your broker.
One-Cancels-the-Other (OCO) an order is a mixture of two entry 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.
For 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, your buy order will be triggered and the 1.1985 sell order will
be automatically canceled.
One-Triggers-the-Other
An OTO is the opposite of the OCO, as it only puts on orders when the
parent order is triggered. You set an OTO order when you want to set
profit taking and stop loss levels ahead of time, even before you get in
a trade
For Example: The USD/CHF
is currently trading at 1.2000. You believe that once it hits 1.2100,
it will reverse and head downwards but only up to 1.1900. The problem is
that you will be gone for an entire week and there is no
available internet.
In order to catch the move while you are away, you set a sell limit at 1.2000 and at the same time, place a related buy limit at 1.1900, and just in case, place a stop-loss at 1.2100. As an OTO, both the buy limit and the stop-loss orders will only be placed if your initial sell order at 1.2000 gets triggered.
Conclusions to this topic, The basic order types (market, limit entry, stop-entry, stop loss,
and trailing stop) are usually all that most traders ever need. Stick with the basic stuff first. Make sure you fully understand and are comfortable with your broker's order entry system before executing a trade.
Also, 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.
For more details about Forex Trading with ICM Brokers, please click the link: www.ICMBrokers.com and feel free to access our product and services that can help you easily to trade.
