Forex Trading

• Sellers are ASKing for a high price
• Buyers are BIDding at a lower price
• Trading is an auction
• Slippage occurs with most Market Orders
• The difference between the ASK and the BID price is the SPREAD.
A Trader must understand what each order is, what it and what part it plays in capturing profit.
A Forex Trader must use three (3) types of orders: a Market Order, a Limit Order, and a Stop Order.
The two, primary orders used for entering and exiting the Forex market are Limit and Stop Orders. Once
an order is placed, there are two critical procedures: One‐Cancels‐the‐Other (OCO) and Cancel‐and‐
Replace Orders. Properly understanding the procedures of order execution is a vital step to profitable
trading.
Remember: All good carpenters carry a toolbox. The sharper the tools, and the more skilled the
carpenter is at using them, the more effective they are. The sharper you become as a trader, the more
efficient and lucrative you will be.
Market Orders
A Market Order is an order given to a broker to buy or sell a currency at whatever the market is trading
it for at that moment. The Market Order can be an entry order into the market, or an exit order to get
out of the market. Traders use Market Orders when they are ready to make the commitment to enter or
exit the market. Caution should be exercised when using Market Orders in fast moving markets. During
periods of rapid rallies, or down reactions, gains or losses of many points may occur due to slippage
before receiving the fill.
Trading is an auction where there are buyers bidding on what sellers are offering. The bid is the buy and
the offer to sell is the ask.
Slippage
Slippage is a trade executed between a buyer and seller where the resulting buy or sell transaction is
different than the price seen just prior to order execution. On average, one to six pips will be lost with
Market Orders, perhaps more, due to slippage. Market Orders are rarely filled at the exact, anticipated
price. Market Traders Institute recommends caution when entering or exiting with a Market Order.
Limit Orders
Limit Orders are orders given to a broker to buy or sell currency lots at a certain price or better. The
term "Limit" means exactly what it says. Most of the time, you will buy at that exact limit price or better.
Limit Orders are used to enter and exit the market. They are generally used to acquire a specific price,
avoid slippage and unwanted order fills (execution price), which can happen with Market Orders.
When selling above the market, it is a Limit Order. When buying below the market, it is a Limit Order. A
Limit Order will be executed when the market trades through it. Seventy to ninety percent of the time, if
the market is trading at your Limit Order, it will be executed. The market must trade through your
specified Limit Order number to guarantee a fill. The trading software provides notification within
seconds of the fill. A trader does not have to call his broker to see if their order has been filled.
Stop Orders
Stop Orders are orders placed to enter or exit the market at a desired, specific price. When buying
above the market, it is a Stop Order. When selling below the market, it is a Stop Order. Stop Orders turn
into Market Orders when the market trades at that price. Stop Orders, as well as Market Orders, are
subject to slippage, Limit Orders are not.
The majority of Stop Orders are used as protective, Stop Loss Orders. These orders are placed with an
Entry Order to insure an exit when the market goes against you. A good trader never trades without a
protective Stop Loss Order. They are orders executed to get you out of the market when your trade has
gone against you. Protective Stops are discussed separately as one of The 10 Keys to Successful Trading.
One Cancels the Other (OCO)
Whenever entering the market, exiting the market at some future time is required. An OCO order is a
procedure that means "one‐cancels‐the‐other." Upon entering the market, place a protective Stop Loss
Order and establish a projected profit target. That projected profit target can be your Limit Order.
If you simultaneously place both Limit and Stop Loss Orders when you enter the market, you can OCO
them and walk away from your computer. What does that mean? At some future point in time, either
your Stop Order or Limit Order will automatically cancel your opposing order. If the trader is sure about
a trade, they can execute an OCO order and walk away from the trade. The trading software will then
manage the trade.
Cancel/Replace Orders
A Cancel/Replace Order is a procedure and not an Entry or Exit Order. By definition, it is when the trader
cancels an existing open order and replaces it replace it with a new order. A Cancel/Replace order is
primarily a strategy of trading and predominately used after one has taken a position in the market and
wants to stay in the market locking in profit. For example, you buy Swiss at 1.410. Your protective Stop
Loss Order is 1.390. The market moves in the direction you projected. Now, you want to reduce your
potential loss. So, cancel your Stop Order at 1.390 and replace it to 1.410 where you got in. You are now
in a trade with no risk! As the market moves further North, in your direction, you want to lock in more
profit. You can cancel your 1.410 Stop Loss Order and replace it with a new 1.440 Stop Loss Order. You
have locked in 30 pips of profit. You are in an all‐win, no‐risk trade. Keep canceling and replacing your
Stop until you are finally stopped‐out. This is discussed separately under "Protective Stops" as one of The 10 Keys to Successful Trading.