Lesson 3: Forex order types

FOREX Order Types

In order to be a successful FOREX trader you need to have a clear understanding of each Forex order type. Some of these you will have encountered in our definitions but bear mention and expansion:

1. The Market Order

   An order, to buy or sell, at the current market price.
   These can be used to enter or exit a trade.
   Remember with these that there may be a difference between the price seen at the time such order is given and the actual price of the transaction. The cause of this is slippage, an amount by which a move occurs in the market between the giving of an order and it's execution and is a result of fast moving markets. A loss or gain of several Pips can result from slippage and as a consequence always use these with care.
   

2. The Limit Order

   This is an order to buy or sell at a certain limit.
   Limit orders can be used to buy currency below the market price sell currency above the market price.
   There is no slippage associated with limit orders.
   When buying, when the market falls to your limit order price your order is executed.
   When selling, when the market rises to your limit order price, your order is executed
   

3. The Stop Order

   This is an order to buy above the market or to sell below the market.
   In order to limit losses if the market moves contrary to what the trader expected, a Stop –Loss order will be used.
   Should the market fall below the point set by the trader, this order will sell the currency.
   

4. The One Cancels the Other (OCO)

   The OCO order is used when placing a limit order and a stop-loss order simultaneously.
   This allows the trader to make a transaction without monitoring the market.
   Should the market fall, the stop-loss order will be executed.
   Should the market rise to the level of the limit order, the currency will be sold at a profit.
   The result is that should either order be executed the other is cancelled.
   Here's an example of an OCO Transaction:
   Buy: 1 standard lot EUR/USD @1.5500 = $ 155,000
   Pip Value: 1 pip= $ 10
   Stop- Loss: 1.5480
   Limit: 1.5600
   This is an order to buy US dollars at 1.5500 and to sell them if they fall to 1.5480 (resulting in a loss of 20 pips or $200) or to sell them if they rise to 1.5600 (resulting in a profit of 100 pips or $1,000).
   Lets look at another example:
   USDJPY US Dollar / Japanese Yen "Dollar Yen"
   The current bid/ask price for US dollars and Japanese Yen is
   USD/JPY 1.2060/65
   This means you can buy $1 US for 1.2060 Yen (JPY) or sell 1.2065 JPY for $1 US.
   If you think that the US dollar (USD) is undervalued against the Japanese Yen (JPY) you would buy USD and simultaneously sell JPY and wait for the US dollar to rise.
   This is the transaction:
   Buy USD: 1 standard lot USD/JPY @ 1.2060= $120,600 JPY
   Pip Value: 1 pip = $10
   Stop-Loss: 1.2050
   Margin: $1,000 (1%)
   You are buying US$100,000 and selling JPY 120,600.
   Your stop loss order will be executed if the dollar falls below 1.2050, in which case you will lose $100.
   However, USD/JYP rises to 1.2090/95.
   You can now sell $1 US for 1.2090 JYP or sell 1.2095 JYP for $1 US.
   Because you bought Long (entered the transaction by buying US dollars), you now have to sell US dollars and buy back Japanese Yen to realize your profit.
   You sell US$100,000 at the current USD/JYP rate of 1.2090, and receive 120,900 JYP for which you originally paid JYP $120,600.
   Your profit is JYP 300 or US$ 248.04 (300 divided by the current exchange rate of 1.2095)
   

Systems

The Trading systems are an important set of rules and ideally should involve the following:

• A. A trend filter which should identify developing trends (short, intermediate, long) and their direction (upwards, downwards, sideways).
• B. An entry system to produce various signals based on various technical indicators (such as moving averages and chart breakouts)
• C. An ability to generate exit orders (profittaking and/or stop loss) with exit formulas before a trade.
• D. Certain principles of Money Management to determine how much your trading account is risked per trade, which in turn should produce more consistent and lasting results. Bear in mind the following cautions when trading: Don't trade several currencies with little capital! and Don't over trade!
• E. Objective and Mechanical trading rules, with building blocks of technical indicators.

Any system should be tested over a long time frame and within different types of trading markets before using it in the market.
You should also forward-test systems in real time
At all times remember that the user defines how good a system operates. Objectivity of the trader remains key when interpreting and implementing signals despite the system appearing objective and mechanical. Always wait for a signal before trading (or as a reason not to trade).
Don't be impatient!
In real time over-optimized systems rarely perform well. These systems start asking the what-if question and back-test the trading system with different parameters

Patterns

Remember dear traveler, there are many patterns that can be used in technical analysis, and there are as many ways to view them.
In this lesson I'll show you what can be called "traditional" price vs time charts, and we'll explore only the patterns that can be located visually on such charts.
Lets start then with a very basic look at these patterns:

The Triangle

The "classical" triangle.
This has at least 5 waves.
The breakthrough occurs at about 2/3 of the horizontal size of a triangle.
The price should not just touch the side of a triangle, the price bar must close outside the triangle. This protects against false signals.
A false signal is more likely to be produced during the uptrend, observable when the breakthrough happens too close to the end of a triangle.