Lesson 8: Order Types—Understand How to Enter and Exit the Market with Confidence
Reading Time: 8 minutes
Gone are the days of hand gestures and face-to-face contact. Today, the majority of trading
operations are facilitated through electronic trading systems. Consequently, understanding how traders and
brokerages communicate through trading platforms is imperative.
Like a saw is used for cutting solid material to prescribed lengths, order types are the tools
used by market participants to express desired trading actions. While a number of types of orders exist,
their main function is to enter and exit trades.
One of the simplest order types is a market order, an instruction to enter or exit (buy [long
position] or sell [short position]) a security immediately at the next available price. Market orders,
therefore, are commonly used by traders who deem current market prices as favourable entry or exit points.
It is important to take into account that market conditions can affect the price received. In
volatile markets—rapid price fluctuations—or thin liquidity, bid and ask price levels may expand and cause
slippage (the price requested is not aligned with the fill price).
Using the MetaTrader 4 (MT4) trading platform (figure A), the EUR/USD currency pair displays a
bid/ask price of $1.10382/$1.10384. By clicking ‘Sell by Market’ (to sell the bid of $1.10382) or ‘Buy the
Market’ (to buy the ask at $1.10384), the trader is entering the market immediately with 1 standard lot
(Volume). Though, volatility, as highlighted above, can influence displayed bid/ask prices.
(Figure A: MetaTrader 4 Order Window)
A limit order is a command to buy or sell at pre-determined price levels, or better. In other
words, it permits market participants to limit their instruction to a specific price received from
their broker (a limit price), whether for entry or exit. Note that limit orders are sometimes
referred to as pending orders as they’re pending until filled.
• A limit BUY order (buy limit order) is placed BELOW current market
• A limit SELL order (sell limit order) is placed ABOVE current market
As an example, assume a trader employing technical analysis seeks a long position (a buy
position) on GBP/USD as the market has been trending over the past month. Instead of entering at current
market prices using a market order, the trader believes the currency pair will correct and offer a cheaper
entry price. Opting to work with a limit buy order below current price to catch any retracement is an
option in this scenario.
As presented in figure B, the order window for pending orders shows the option of either a buy
or sell limit order, available from the drop-down tab: ‘Type’. At what price the limit order is set is
arranged through the ‘at price’ section, with a choice of selecting an expiration date for the chosen limit
(Figure B: MetaTrader 4 Order Window)
Another form of pending order is the buy and sell-stop entry orders, frequently used by
Traders use a buy-stop order to buy at a level above market price, and is filled when
the ask price tests the buy-stop level. Conversely, a sell-stop order is set beneath market price and is
triggered when the bid price tests the level. Do note these order types are market orders once filled.
An example of the buy-stop entry order window can be seen in figure C. With similar settings to
the limit order, the only difference is from ‘Type’: the trader selects either Buy or Sell Stop.
(Figure C: MetaTrader 4 Order Window)
Protective Stop-Loss Order
The protective stop-loss order—sometimes referred to as a money-management stop—functions as an
instruction to liquidate a position in the event price moves unfavourably. A stop-loss order is a vital
risk-management tool that helps prevent financial ruin. However, do keep in mind that a stop-loss order is a
market order. Think of it as a pending market order which is activated once prices trigger the level. This
is also the same for take-profit levels.
(Figure D MetaTrader 4 Order Window)
A protective stop-loss order allows traders and investors to predetermine risk tolerance,
reducing the chance of large unexpected losses.
By way of an example, say EUR/USD trades at $1.2050 and a trader enters a long position at
current price using a market order. According to the trader’s trading strategy, a 20-pip stop is sufficient
and he/she consequently places a protective stop-loss order under current price at $1.2030. If price reaches
$1.2030, the position will be automatically closed. As stop-loss orders are essentially market orders once
filled, slippage may still occur.
A protective stop-loss order also serves as a trailing stop, a method of trailing profitable
positions by modifying its location according to price movement.
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