Long or Short? Order types

buy or sellThe goal of trading the markets is to buy low and to sell high or to sell high and buy it low – I’m guessing that there is a bit confusion and you are asking “how am I supposed to sell something that I don’t have or don’t own?” Please recall from previous lesson that on Forex market you’re doing to transaction simultaneously – when you sell a currency pair you are actually buying the quote currency (the second currency in the pair) and selling the base currency (the first currency in the pair). Another great thing about the Forex market is that you have more of a potential to profit in both rising and falling markets due to the fact that there is no market bias like the bullish bias of stocks. Anyone who has traded for a while knows that the fastest money is made in falling markets, so if you learn to trade both bull and bear markets you will have plenty of opportunities to profit.

Well the ability to buy or to sell certain currency pair is known as going “long” or “short” and you can profit regardless of whether the market is moving up or down.

In this lesson we’re going to cover what ‘long or short’ means and I will also cover the different order types:

  • Long – If you consider that price is going to appreciate in the future, then you are going to buy it and sell it higher – buying also is known as taking a long. This means we are buying the first currency in the pair and selling the second. So, if we buy the EUR/USD and the euro strengthens relative to the U.S. dollar, we will be in a profitable trade.
  • Short – If you consider that price is going to fall in the future, then you are going to sell it and buy it lower – selling also is known as taking a long. This means we are selling the first currency in the pair and buying the second. So, if we sell the GBP/USD and the British pound weakens relative to the U.S. dollar, we will be in a profitable trade.

Now that being said we moved on order types – when you execute a trade in the Forex market is known as an “order” – there are several types of orders and can vary between brokers. Don’t be scared all brokers provide some basic order types and if you want a “little extra” may be you will have to change your broker

  • Market order – A market order is an order that’s placed ‘at the market’ and it’s executed straight away within the best available price.

stop limits

  • Limit entry order – A limit entry order is positioned with the idea to buy below the current market price or sell over the market price. This can be a bit difficult understand in the beginning so allow me to explain:

If the GBP/USD is currently trading at 1.6000 and you want to go sell the market if it goes to 1.6050, you can place a limit sell order and then when the market touches 1.6050 it will fill you short. Thus, the limit sell order is placed ABOVE current market price. If you want to buy the GBP/USD at 1.5950 and the market is trading at 1.6600, you would place your limit buy order at 1.5950 and then if the market hits that level it will fill you long. Thus the limit buy order is placed BELOW current market price.

  • Stop Entry order – A stop-entry order is placed to buy over the market price or sell below it. For instance, if you want to trade long but you desire to enter on a breakout of a resistance area, you’d probably put your buy stop just above the resistance and you would get filled as price rises into the stop entry order. The alternative is true for any sell-stop entry if you wish to sell the market.
  • stop lossStop Loss order – A stop-loss order is an order that is connected to a trade with regards to avoiding additional losses in the event the price moves beyond a level which you designate. The stop-loss is perhaps the most important order in Forex trading since it gives you the opportunity to take control of your risk and limit losses. This order remains basically until the position is liquidated or you modify or cancel the stop-loss order.
  • Trailing Stop – The trailing stop-loss order is an order that’s connected to a trade like the standard stop-loss, but a trailing stop-loss moves or ‘trails’ the present market price as the trade proceeds in your favor. You are able to generally set the trailing stop-loss to trail at a certain distance from current market price, it will not start moving until eventually or unless the price moves greater than the distance you specify. For instance, if you set a 40 pip trailing stop within the EURUSD, the stop is not going to go up until your position is in your favor by 41 pips, and therefore the stop will only move again if the market moves 41 pips above where your trailing stop is, which means this way you can lock in profit as the market moves in your favor while still giving the trade room to develop and breath. Trailing stops might be best used in strong trending markets.
  • Good ‘Til Canceled Order (GTC) – A good ’til canceled order is an order to buy or sell in a set price and stays active until you either cancel the order or the trade is executed.
  • Good For The Day Order (GFD) – Just like the name implies, a good for the day order is definitely an order that’ll be canceled after your day if it’s not filled. Time where your order is going to be canceled depends upon where your broker is situated, so look for with them first.
  • One Cancels Other Order (OCO) – Again, pretty obvious from the name, it is a set of orders where if one is executed, the other is instantly terminated. This is often used by Forex traders who hedge in order to mitigate risk, however if you’re in the United States, this isn’t an option.

Hopefully this session has helped you to definitely better understand the term ‘long or short’ as well as the many order types at your disposal. Not all brokers offer the last three order types, so you’ll would like to seek advice from a broker before creating an account if you are planning to make use of any of them. In my experience, all brokers offer limit and stop orders, not to mention market orders, and quite a few support trailing stops.

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