Making a Forex Trade

You know how an individual trade works, how to calculate your profit and loss, and even how leverage plays into your trades. Now you’re at the final step. We’ll cover what you need to know about making a trade in foreign exchange.

Forex brokers offer several different types of forex trades, or orders:

1. Market order – Perhaps the most common of all orders on the foreign exchange market, a market order is one in which you agree to make a trade at the currently available price. Assume that you wanted to purchase GBP/USD at the ask price of 1.5342. You click the market order, and the order is processed instantly at the market price.
2. Limit Order – A limit order is an order you place with limitations. Assume you want to place a trade, but only if it reaches a certain price. You want to buy GBP/USD at 1.5400, but it currently trades at 1.5342. You would place a limit order and should the price rise to 1.5400, you would be automatically entered into the trade. The cool thing about limit orders is that you do not have to be online or at your desk in order for the trade to be processed.
3. Stop-Loss Order – A stop-loss order is a trade that you purchase to prevent large losses to your account. This is a very important type of order. Assume that you went “short” the pair GBP/USD at 1.5200. You think the pair will go down to 1.5000, but just in case the pair goes in the opposite direction, you don’t want to lose any more than 100 pips. Thus, you enter a stop-loss at 1.5300, which limits the most you can lose in a trade.
4. Trailing Stop – Another type of forex order, a trailing stop is intended to limit your downside, but still maximize your upside. With a trailing stop, the stop loss always trails the price by a certain amount. Say, for example, that you want to buy USD/CAD at 1.1243 but at no point do you want to lose more than 20 pips, and you don’t want to give up more than 20 pips of upside. You enter the trade with a trailing stop for 20 pips. As such, the trailing stop will “trail” the currency pair when it moves in your direction, but not against it. So, if you were to buy USD/CAD at 1.1243, and it were to rise to 1.1273, then the trailing stop would sit at 1.1253. No matter where the currency pair goes from there, you have already locked in a 10 pip gain, even if it plummets in price.

These are the four most common orders, and the only orders that spot forex traders should need to know. There are more, of course, but few traders—even professional traders—ever use any other types of orders than these four.

Of course, we’ll get to them in the future, but for now it’s time for a quiz on what you’ve learned