Tuesday, 21 February 2017

Lesson 1 – Introduction to Forex Trading - Understanding the basics - Part 3

Types of Orders

The term "order" refers to how you will enter or exit a trade. The following section will discuss the different types of orders that can be placed in the foreign exchange market.

There are some basic order types that all brokers provide, and some others that are a bit more complex. Be sure that you know which types of orders your broker will accept. Different brokers accept different types of orders.

Market order

A market order is an order to buy or sell at the best available price. Essentially, you get into the market straight away at whatever price you can get. Just remember, you buy at the ask price and sell at the bid price.

Limit Entry Order

A limit entry is an order placed to either buy below the market or sell above the market at a certain price. These are generally used when traders want to enter the market in a value area. For instance, if a trader thinks the market is going to retrace lower from highs before moving higher again, he might use a limit buy below the current price, so that when the market retraces he can go long for the push higher.

This is a useful technique if you can’t watch the market 24/7, as they will fill automatically, but be aware that if the market doesn’t retrace, you will be left with an open position. Also, once you have placed an order such as this it is easy to forget about it, so check regularly whether you have any open limit orders.

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. It is similar to the limit order, but typically used in breakout plays. Here, traders are waiting for a currency to break through a level before entering in the direction of the breakout. They will place a stop-entry order at the breakout level to get into the trade shortly after it breaks out.

Stop-Loss Order

A stop-loss order is a type of order linked to a trade, for the purpose of preventing additional losses if price goes against you. A stop-loss order remains in effect until the position is liquidated or you cancel the stop-loss order. Stop-losses are extremely useful for traders who don't want to sit in front of their monitor all day, worried that they will lose all their money. They are the cornerstone of good risk and money management. Use them well!

Trailing Stop

A trailing stop is a type of stop-loss order attached to a trade that moves as price fluctuates. As the stop ratchets in the profitable direction of your price, it essentially locks in profit for you as the trade goes in your direction, until the stop is hit.

Trading sessions

During the week, the Forex market is open 24 hours per day, but not all times of the day are equal. Understanding why is an important lesson for any trader so that they can adapt their trading style to suit the market conditions.

Liquidity, or the ability to fill a trade without significant shifts in price, is a key concern when comparing various times of day. Highly liquid pairs like EURUSD can soak up very large orders without blinking, but more exotic pairs will likely slip more noticeably when a very large order is placed. This is because there are less counter orders in the market, meaning that the large order consumes all of the nearby counter orders at various prices before eventually being fully filled. This effect is exaggerated during low liquidity times.

In reality, the exceptional size of the FX market will mean that the smooth opening and closing of positions won’t be a concern for any but the largest of traders, but what is worth noting is how the behaviour of the market changes during periods of varying liquidity.

For high liquidity, there needs to be a large number of orders in the market, so it fits that the highest liquidity periods of the day are when the largest number of traders are active in the market.

liquidity chart
Measured liquidity relative to a 30 day average for the main trading sessions (source: www.forexfactory.com)

Sydney (10pm – 7am GMT)

This is where the trading day and trading week starts, although it is perhaps the quietest of the sessions, apart from an occasional pick up in volatility at the weekly open as traders react to the weekend’s news. It is also worth remembering that the interbank market can be active several hours before the retail Forex market, so it is possible that there will be large gaps in price when the retail Forex market opens.

Professional traders use NY close charting too, which means that daily candles will begin at the start of this session and close at the end of the NY session. Depending on the price action, this can also be a source of volatility at the daily open. On the whole, though, liquidity is frequently the lowest until Asia opens. Spreads will be wide and trading is often very slow. The previous day’s moves will typically be consolidating by now, unless there is a major market-moving piece of news. When a big piece of news lands during this session, the thin conditions cause excessive volatility and exaggerate any moves.

Tokyo (12am to 9am GMT)

Liquidity increases at the beginning of the Tokyo session, as Figure 1 shows. This activity typically reduces as the session progresses, with America and Europe fast asleep. The Yen and Australian pairs are often the most active pairs during this session as the Tokyo and Sydney stock exchanges are open. The large moves observed in the London and NY sessions, though, are less common in the Asian session, which makes range-bound and breakout trading more suitable.

London (8am to 5pm GMT)

London dominates the Forex market place, so the larger moves are often started during this session. The London open at 8am is often a turning point for the day’s trading activities, and large trending moves can frequently be observed during this session. UK and European data is typically early in the London session, so when Asia closes at 10am, there can be a slight lull until NY opens, unless there is a strong trend to keep things ticking along.

New York (1pm to 10pm GMT)

New York is where the trading day and therefore trading week ends. US data is typically early in the session too, so the crossover from London to New York is one of the most important times of day for traders. Liquidity is at its highest, spreads typically at their lowest and the risk of an exhausted trend reversing is high.

As London closes, what is referred to as the “NY afternoon” begins. The trading activity dies down, but there are still a lot of traders in America sitting at their desks. As such, if an important piece of news hits during this time, it can display remarkable volatility, which again makes news and breakout trading favourable during this quiet period.

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