LESSON 2
TYPES OF FOREX ORDERS
The term “order” refers to how you will enter or exit a trade.
- Market order: It is an order to buy or sell at the current market price
- Limit order: It is an order placed to buy or sell at a future price.
- Stop loss order: It prevents additional losses if the price goes against
- Entry order: It allows a trader to buy or sell at a price different from the current price
- Limit Entry Order:
A limit entry is an order placed to buy below the market or sell above the market at a certain price. You use this type of entry order when you believe price will reverse upon hitting the price you specified!
- Stop-Entry Order:
A stop-entry order is an order placed to buy above the market or sell below the market at a certain price. You use stop-entry orders when you feel that price will move in one direction!
- OCO Order: One Cancels Other. An order whereby if one is executed the other is cancelled.
- GTC Order: Good Till Cancelled – An order stays on the market until it is either filled or cancelled.
- GFD Order: Good For Day – This order remains active in the market until the end of trading day.
- Trailing Stop: It is an active stop loss that keeps a set distance away from the current market price and updates according to the market. This is best used in a moving market that is going in the direction the trader wants and the trader wishes to guarantee the profits made.
COMMON FOREX TERMS
Manual execution
An order which is executed by dealer intervention
Automatic execution
The order is executed automatically without dealer intervention or involvement.
Slippage
The difference between the order price and the executed price, measured in pips.
Slippage often occurs in fast moving and volatile market or where there is manual execution of trades.
Drawdown
The decline in account balance from peak to valley until the accounts surpasses the previous high, usually measured in percentage terms.
EMU (European Monetary Union) Members:
These are the members that use Euro:
- Germany
- France
- Belgium
- Luxembourg
- Austria
- Finland
- Ireland
- Netherlands
- Italy
- Spain
- Portugal
Central banks:
German’s Central Bank – Bundes Bank
European’s Central Bank – ECB
USA Central Bank – Federal Reserve
Bank of England – BOE
Bank of Japan – BOJ
Reserve Bank of Australia – RBA
Reserve Bank of New Zealand – RBNZ
Bank of Canada – BOC
Swiss National Bank – SNB
G7: (A group of finance ministers from 7 major industrialized countries who meet several times per year to try to sort out various economic issues.)
- USA
- Germany
- Japan
- France
- UK
- Canada
- Italy
Swap Free Account
Some brokers offer accounts that do not charge or pay swap interest. This type of account is often called an “Islamic Account” since the Islamic faith forbids charging or paying interest on loans.
Spike
A sudden, significant change in value of a currency pair, plainly visible on 1 minute or shorter timeframe charts. Spikes are often caused by news releases.
Retracement
After price has trended in one direction, it often moves back losing part of its gain. This happens in both bullish and bearish.
Retracement Trading
This is to wait after the market has moved initially after the news, i.e. wait until the “spike” is over, and after the market retraces (or comes back) to a certain level you jump in since the market should make another attempt to retest the spike… And this usually takes place if the release is strong enough to create momentum.
Straddle
To place pending buy and sell orders on the same currency pair. Often done just before a major news release. Can also be done if a currency is expected to break out of a price range, but the direction of the breakout is uncertain.
FOMC (Federal Open Market Committee)
The group headed by the Chairman of Federal Reserve that establishes credit and interest rate policies for the Federal Reserve.
Hawkish / Dovish
They are “market speak” terms (like Bull and Bear) used to describe the Feds attitude mainly towards interest rates, particularly the need to raise or lower them.When the interest rates are raised, look to buy that currency involved.When the interest rates are lowered, look to sell that currency involved.
A dovish economy would tend to indicate lower interest rates), or a specific action or event (a dovish action is not going to be strong or aggressive).
Hawkish is favoring an increase in interest rates.
*WHO TRADES IN THE FOREX MARKET?
They can be separated in two groups:
(a) Hedgers
This is the governments, companies (exporters and importers) and some investors who have foreign exchange exposure. It is the core of the FX Trading but only makes up approximately 5% of the actual market.
(b) Speculators
This group includes banks, funds, corporations and individuals who create artificial rate exposure in order to profit from the variations or movement in the price.
THE COMMON TRADING STYLES
- Technical analysis
A style of trading that involves analyzing price charts for technical patterns of behavior.
- Fundamental analysis
It is a style of trading whereby a trader attempts to profit from fundamental news announcement on a country’s economy that may affect the value of a currency usually seeking short-term profit immediately after the announcement is released.
- Trend trading
A style of trading that attempts to profit from riding short, medium or long term trend in price.
- Range trading
A style of trading that attempt to profit from buying and selling currencies between a lower level of support and upper level of resistance. The upper level of resistance and lower level of support defines the range.
- Scalping
Style of trading that involves frequent trading seeking small gains over a very short period of time. Trades can last from seconds to minutes.
- Day trading
A style of trading that involves trading on an intra-day basis. Trades can last from minutes to hours. It involves multiple trades.
- Carry trading
A style of trading whereby the trader attempts to profit from holding a currency with higher rate of interest and selling a currency with a lower rate of interest, profiting from the daily interest rate differential of the position.
- Swing trading
A style of trading that involves seeking to profit from short to medium term swings in trend. Trade can last from hours to days.
- Position trading
A style of trading that involves taking a long term position that reflects a longer term outlook. Trades can last from weeks to months.
- Discretionary trading
A style of trading that uses human judgment and decision making in every trade.
- Automated trading
A style of trading that involves neither human decision making nor involvement but uses a pre-programmed strategy based on technical or fundamental analysis to automatically execute trade via an automated software program.
FOREX MATHEMATICS
- Pip – it is smallest amount an exchange rate can move. It means price interest point. There are two ways to represent the pip
- In EUR/USD a move from 1.2494 to 1.2498 is 4 Pips or 0.0004
- In USD/JPY a move from 108.21 to 108.25 is 4 Pips
- Lots – Forex is traded in lots. They are three types of lots
- Micro (less than 10,000 USD)
- Mini (10,000 – 100,000 USD)
- Standard (more than 100,000 USD)
TRADERS TIME FRAMES
NB:
- Use two or more time frames to study the market and identify the general trend
- Always zoom out using the large time frame to see what is happening in the market.
- Use more time frames to determine your entry and exit points
The 3 types of traders and the time frames they use:
- Intra-day (scalp traders)
- they use minute charts (15mins and 30 mins and trade during the day
Advantages
- It offers several trading opportunities
- Enables to give specific returns per month
- No overnight risk
Disadvantages
- You pay more spreads
- It is mentally taxing
- There are limited profits
- Short-term traders (day & swing traders)
- These traders use hourly timeframes (maybe from hours to 1 week)
Advantages
- They give more trading opportunities
- Offer specific returns per month
Disadvantage
- Overnight risks
- Long-term traders (position traders)
- This is trade in weeks, month or years, e.g. banks
- These traders use weekly charts
Advantages
- Less paying of spreads
- It is flexible
Disadvantages
- Requires a lot of patience
- Large accounts needed to ride in the long-term swings
- Not able to give specific returns