The Trading Process

Posted By Robert On Thursday, January 16th, 2014 With 0 Comments

In this section we take a step by step approach at how a typical foreign exchange order is executed in the market.  The type of order that a trader uses will reflect both their own trading style and their overall market objectives. Note that interpretation of orders may vary slightly from one broker to another and hence care should be taken to ensure that no ambiguity exists. Most orders are based on simple common sense. Nevertheless it is important for you as a client to fully understand these orders and use them correctly. By doing so you will greatly reduce the chances of any misunderstanding that can result in costly errors. This will enable you o place your orders quickly and precisely during times when the markets are volatile and are reacting to new events. Outlined below are some typical orders and their common interpretations.

Order types

Before placing an order in the foreign exchange market it is extremely important to recognise that all orders placed in this market (irrespective of their type) are GOOD TILL CANCELLED. A GTC order therefore remains live until it is filled altered or cancelled.

Limit Order: This is the most commonly used order type. The limit order indicates that the client is willing to buy (or sell) at a particular price. The order ‘buy 100,000 Dollar/Yen at 122.50’, indicates that the market is trading at a higher level than the limit order, say at 123.00, and the client wishes to buy at a lower level, in this case 122.50. If the market falls to a traded price of 122.50, the client may be filled at this level, but this is not guaranteed. (see ‘market-if-touched’ order). The order ‘sell 100,000 Dollar/Yen at 124.00’ indicates that the client wishes to sell above the current market price and the execution of that order depends on the market rallying up to that level.

Market Order: This order type, instructs your adviser to execute a trade as soon as possible, with a minimum of delay and does not provide any discretion for time or price. An order to ‘buy at market’ will result in you buying at the current offer price. For example, if the bid/offer spread in the AUD is currently 0.5150/ 0.5155, an order to ‘buy AUD 100,000 at market’ would be filled at 0.5155. The client would receive a bought foreign exchange position at 0.5155.

One Cancels the Other (OCO): When clients wish to enter a limit order to exit the market with a profit, while at the same time enter a stop level to limit their loss, they should specify that one order cancels the other. For example with the market at USD /JPY 123.00 you might place an order as follows: ‘Sell USD/JPY 100,000 at 126.50, OCO 122.50 on stop’.

On stop or stop-loss order: This order is used by traders to cut a losing position, protect an existing profit or even as a means of entering a position, once a pre-determined price is traded. A disciplined trader would enter a market and then immediately place a stop-loss order. For example, a trader who buys 100,000 AUD/USD at 0.4940 may instruct their adviser to “sell 100,000 AUD/USD at 0.4920 on stop”. If the market falls to a traded price of 0.4920, or is offered at that level, a sell stop-loss order at 0.4920 becomes a market order. This may be 0.4920, or it may be at a less favourable price – up to several points less favourable depending on the prevailing market volatility.

Order at best: This order type is essentially a market order, but provides the dealer with some discretion in terms of time and price. This order will be executed relatively quickly. ‘Buy 100,000 AUD/USD at best’. With a spread of 0.4975/0.4985 in the AUS/USD, the dealer would try to fill the order better than 0.4985. The dealer may bid 0.4980 in the hope of getting a point better than the current market.

Limit order with discretion: ‘Buy 100,000 AUD/USD at .4940 with 10 points discretion’. This order provides the dealer with 10 points discretion, in addition to the limit price. Be aware that this discretion will often be used.

Stop limit order: This order is used to avoid excessive slippage that may be experienced in a volatile market. An order to ‘buy 100,000 AUD/USD at 0.4960 on stop, limit 0.4965’ ensures that the dealer will pay up to 0.4965 for the order, once the price of .4960 is traded. Traders should be aware, however, that this order may prevent a losing position from being closed, ie. the limit price does not trade at all.

Market if touched (MIT): As a limit order may not be filled, even when the limit price is traded, a trader may use a ‘market-if-touched’ order to guarantee an entry or exit to the market. If the AUD/USD is currently trading at 0.4980, an order to ‘buy 100,000 AUD/USD at .4978 market-if-touched’, would ensure that if the limit of 0.4978 was traded and the order was not filled, the trader would execute this order by buying 100,000 AUD/USD at market – ie. the next available offer price.

Order Placement

When placing an order over the phone or via your computer, in order to avoid ambiguity, you would do well to become familiar with the correct way to place orders, thereby eliminating any possible error. In all cases, this means clearly stating the order in simple, straightforward language. There are four distinct elements you must include in your order, as follows: BUY or SELL; Volume; Contract (commodity and month); Price and other instructions (order type).

There is more than one currency to trade, so if you want AUD/USD, you have to let the adviser know that. You also say whether you’re buying or selling and how many contracts you want bought or sold. With certain types of orders you even specify the price. For example, “Buy 100,000 AUD at 0.4994 on stop”. This order is clear, precise and unambiguous.

As far as order placement is concerned, the important issue is to keep the order simple and clear and not to make it more complicated than it really is. Always remember to use the terms BUY or SELL and never assume that your adviser knows your current open position and knows exactly what you want to do to exit that position. You must always be familiar with your open position and the necessary order to close that position. Following are some incorrect or misleading orders and the corresponding correct order:

Stop Order Mistakes

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