Understanding the Ins and Outs of Execution in the Financial Markets
Technological advances have automated most executions in the financial markets today, including those in the Forex market, making trades easier, faster, and more accurate.
In the financial markets, market participants buy and sell a variety of products. Such products are:
- Stock indexes and exchange-traded funds, or ETF’s
- Individual stocks
Additionally, market participants can trade currency pairs in the financial markets known as the Forex market (short for “foreign exchange”).
Brokers from all over the world, from Singapore to the United Kingdom and Australia to Europe, offer trading platforms connected to online trading accounts. All trading accounts these days allow market participants to trade using pending orders.
The pending orders discussed below represent automated trades. In other words, buying and selling take place automatically, without human intervention.
Types of Pending Orders
In this automated climate, market participants set pending orders with instructions to buy or sell at certain points. For example:
Sell Limit Order
A sell limit order permits traders to sell when the product reaches a level that is higher than the current market price. After a trader places the order it becomes active. Then, the trading platform will automatically execute it if the price reaches the level set by the trader. Traders don’t even need to be in front of their computers or to have the trading platform open.
Sell Stop Order
A sell stop order is similar to a sell limit order. The only difference is that the trader intends to sell the product at a lower level. When and if the market reaches that level, the broker will execute the pending order.
Buy Limit Order
With a buy limit order, the trader wants to buy when the product reaches a price that is lower than the current price.
Buy Stop Order
When traders bet on the price rising, they place a buy stop order. It could be that the market forms a range due to pending economic news. In that case, it often happens that no one takes a chance to buy or sell before the report comes out. In such a situation, placing a pending order makes sense.
Exiting the Market
How about exiting the market? It is said that the best trading plan involves knowing your way out before you go in. Here are mandatory orders that traders place as pending orders for their exits:
Stop Loss Order
When the price of the product hits the stop loss point, it means the market behaved in a different manner than the anticipated one. It doesn’t necessarily mean the trader will incur a loss. If the trader set the initial stop loss at the break-even point, the broker would close the trade when the market reaches that point.
Take Profit Order
In the case of a take profit order, when the price of a currency pair reaches the take profit level, the broker closes the trade.
Trading at Market
Pending orders offer a great way to trade after the market makes a move and reaches the entry level. However, trading at market means that a trade opens or closes at the current price. When a broker receives an order to trade at market, he or she knows to execute the order immediately.
Traders prefer to trade at the market to avoid slippage. Slippage happens when the market moves fast, and the broker can’t execute the pending orders precisely at the indicated quote. To prevent that, retail traders open and close trades at the market price.
How Does All of This Play Out in the Forex Market?
Now, imagine a market where more than 5 trillion dollars are traded every day, by a considerable number of market participants. This is the Forex market.
Forex market trades take place all over the world, nonstop, 24 hours a day, every day except weekends. Of all the financial markets, the Forex market is the largest. What’s more, an estimated 80 percent of the trades in the Forex market are automated.
Because of these factors, the Forex market is typically more significantly volatile than other financial markets.
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Other types of pending orders exist, such as a trail stop order or one-cancels-other order. However, the idea is the same, with traders automating their entry and exit levels.
It pays to keep in mind that trading is a game of both losing and winning, and that mastering the art of speculation is not for everyone.