ORDERS – STOPS AND LIMITS
As in other financial markets, trader can enter the foreign exchange markets at the market or deal rate (this often known as a Marker Order) or at a future rate, this is known as a Stop (often known as a Stop loss) or Limit Order. However as opposed to other financial markets, placing orders in the Forex Markets is much easier, gives far better results and has many more opportunities and variations on the order placed.
When you wish to enter into a trade at current market conditions one simply executes a buy or sell market order. Often a trader may wish to either limit the loss of the position that has been opened (in which case you are able to set a stop order) or you may wish to enter a trade but at a rate that is more attractive than the current market (in which case you can place a limit order)
As discussed above, a stop order can be placed on an existing open postion to limit the possible loss on the open trade. For instance, say if a trader is long 1,00,000 EUR/USD at 1.2820, he/she is obviously expecting that the EUR/USD rate where he/she will be able to get out at profit. However the trader may wish to limit the loss he/she is willing to take on the trade. If the maximum loss the trader is $1000 and he/she knows that every pip is worth $10 in this case, calculated by 1,00,000 EUR*0.0001 = $10, then he/she will set his/her stop order 100 pisp from the execution price, in this case 1.2720. At 1.2720 the client will loose $1,000 if it is not closed earlier and the platform will execute the order if and when the Bid (since in this case the stop order is a sell order) reaches the stop rate of 1.2720
ORDERS – O.C.O’s, I/D’s AND Trailing stops
As mentioned above there are many combinations of orders that are possible to you in the FX market and in the trading platform. Stop and limit orders as described above are the basic orders available, all the rest are simply a combination of them or contigent orders.
OCO is the short form of “One Cancels the Others”. This is used against an open position and is done in the following way: the trader places a stop order and a limit order against an existing open postion, the first one that hits closes the position (a loss if the stop order hits and a profit if the limit order hits) and when the trade is closed, the reaining order is cancelled.
I/D’s is the short term for “If Done”. This is a spin on the O.C.O, where the O.C.O is placed on an existing trade, the I’D is placed on a trade that has not yet exercised. This can best be shown by example. Say the trader whishes to go short on the AUD/USD at 0.7770 in 2,50,000 AUD but the bid price is currently only 0.7730. Now as above the client wishes to profilt $1,250 USD but is only willing to risk losing $750 USD, then he/she would place the following orders. The trader would set an original limit to sell the 2,50,000 AUD/USD at 0.7770 and place other limit that becomes active if the first limit hits (hence the term if dome)
A Trailing Stop is an active stoploss that keeps a set distance away from the current market price and aupdates according to the market. This is the best used in a moving market that is going in the direction the trader wants and the trader wishes to guarantee the profits made. This can be illustrated by an example:
Say a trader enters into a long 2,00,000 USD/CHF position at 1.2430 and set a stop order at 1.2380 with a trailing stop of 50 pips. The maximum the trader can loose is 50 pips as above, however the stop loss will automatically update itself as the market moves. For instance, if the market moves to 1.2450 then the stop loss would update itself to 1.2400, always keeping 50 pips from the maximum rate, the stop loss will keep updating itself until it traggers or th original trade is closed.
On most of the FX Broker’s platform, traders have the opportunity to hedge their positions. A hedge is a trade that is in the opposite direction of an existing trade or open position. This can be a partial or a full hedge and does not close the position although it has the same affect. Some traders enjoy this feature and capability to hedge an open trader rather than close it out as part of their trading strategy. It should be noted that a hedge has the same affect as closing or partially closing an exisitng trade except for the fact that both the long and the short postions remain in the open positions table, are treated as open trades and must be closed at a later date.
In the spot Forex market, trades settle in two business days. If a trader sells 10,000 EUR on Tuesday, the seller must deliver 10,000 EUR on Thursday unless the position is held open and rolled over to the next value date. Roll over invloves exchanging the expiring postions for a postion expiring the following settlement date. The postions being exchanged are not valued at the same price. If a trade is long the currency bearing the higher intrest rate, the position “being sold” is worth more than the position being acquired. The reverse is also true. If a trder is short the currency bearing the higher interest rate, the trader is acquiring a position worth more than the one “being sold”. The amount of the difference varies based on the currency pair, the interest rate differential between the two currencies, and fluctuates day to day.