This post about how to enter a trade is an extension of this brief lesson. How a trader enters a trade is very crucial in how successful he or she can be. In my rule book, how a trade is entered is part of whatever strategy a trader utilizes. Some traders have very good strategies, but just because their entries are not well calculated; they might never live to realize how potent the said strategy was.
In this lesson, I will take you through the types of forex entry orders that are existent. I will also tell you about the ones that will suit you and the ones that are my favorite. Take a tour with me.
There are basically three types of forex entry orders; market, limits and stops. In order to enter a trade one of the three types of entry orders are used. Different traders stick to different entry styles and while some have a favorite; others use each and every one of them with respect to market conditions. The pros and cons of these are discussed below. I am sure that by the end of this lesson, you would make a decision as to which one to use the most.
How to enter a trade with Market Orders:
Otherwise known as instant execution, it is the most widely used among the forex entry order types. It is pretty suitable for traders who have all the time in the world on their hands. Just like its name suggests, when you open your trading platform to buy or sell, you pull the trigger right away.
If GBPUSD is trading at 1.5451 and you want to buy, you just click on buy instantly to enter the trade. The only thing about market orders that are not so juicy is that people who do not have enough free time cannot make use of them frequently.
Also, a trader might suffer slippage with instant execution orders. Slippage means that there will be a delay in placing the trade; for that matter, the trader will not be able to enter the trade at his pre-intended price.
On slippage, if it is a buy, the order will be placed higher than the intended price; likewise, if it is a sell, the order will be placed lower than the intended price. Slippage is expensive and it is very common with exotic currency pairs. This is because they are lightly traded.
Limit and stop orders work quiet well for the one who does not have the ample time to enter a trade; because he or she has a day job or because of some other reasons. It all balls down to how busy a trader is.
How to enter a trade with Limit orders:
These are orders placed mostly at areas of support and resistance to follow the age old technical concept of buying low and selling high at specified levels. Aside the fact that it works well for the busy personality, I personally have a soft spot for them. This is because limit orders alone can make you stand a high chance of dining at the table of profitable traders.
Why do I say so? It affords you the opportunity to trade by risking a relatively small percentage and gaining a high percentage, thereby giving you the very favorable risk to reward ratios. That is not even the thing I love about limit orders the most; even if a limit order’s stop loss is hit, the loss is minuscule as compared to a stop entry order’s.
One thing I hate about limit orders is that a market may not retrace deep enough or may not retrace at all to trigger your order. Nothing emotional than watching a market move in the direction you predicted without you.
How to enter trades with Stop orders:
These are orders placed to buy higher or sell lower with the expectation that a market may rise further or fall deeper than its current level. Stop entry orders are very common with traders who straddle the news as they set buy and sell stops simultaneously, minutes before a heavy impact news. It is also common with London daybreak strategy traders. (I am not a fan of either of these strategies).
Two opposing stop orders signify one thing, “confusion”, because you’re not so sure what direction the market is taking off and you lose heavily when there’s a spike. As already stated it is only good for traders who do not have enough time on their hands.
Stop orders may not be very favorable because they require wider than normal stop losses. This implies that when a stop order’s stop loss gets hit the loss is deeper than that of a limit order’s. You might be wondering, then why not set a minimal stop loss then? That is when the stop loss would get hit and right after that, the market would move in your favor. Emotional huh?
That aside I make good use of stop orders below support and above resistance to trade unconfirmed chart patterns. The good thing about using them that way is that when the pattern is fake, my orders do not get triggered. The bad news is that there might be a false break.
With limit and stop orders, there are no risks of suffering from slippages. This is probably because the order is set waiting for price to touch and trigger it; there is no way your broker can move your limit or stop order to another price.
So where does my bias go when it comes to entry strategies? I honestly do not remember the last time I entered a trade by market. Since price action is my one and only strategy, limit orders come in first because price action defines support and resistance clearly whenever a setup is about to play out or has already played out.
They are also very good for anticipating retests of breakout of levels. I do not use limit orders because I do not have time on my hands; I use them because of the favorable risk to reward ratios they give.
With limit orders the retest might never come; this means, you will watch the market take off without you. The retest might come but it may not get to your price; you will watch the market take off without you again. Or what you may be anticipating as a retest might just not be so and your stop loss will get hit.
However, it is worthy to note that I have gravitated more towards stop orders nowadays. I’ve done that because I have chosen to be more of a breakout trader than a reversal trader. Anticipating breakouts with stop orders are really helpful since it gives you the best possible early entry.
You would not have to watch market take off without you. Stop orders are also very good for trading textbook price action chart patterns. Stop orders have saved me from a couple of trades that would have ended up as loses.
When compared to limit entries, stop entries may require wider stop loss levels. Also you are very likely to suffer from false breakouts when you stick to stop entries.
Market orders come in third. I check my charts three times a day whilst studying how price has reacted to daily levels on the 4 hour timeframes. But then, I’d rather use them seldom.
As far as you can see, all the three types of forex entry orders have pros and cons; there is not one that can actually be pointed out as the best, but you can have a favorite and swallow the cons like that. This is why you manage risk!
How do you enter a trade? Do you have a favorite? Have they been helpful in the long run? I’d like to know your part of the story in the comment section below.