Forex Orders

So now you know the basics of how the Forex market works, but to understand how to actually use it to turn a profit, you should understand Forex orders. Orders are the way you buy and sell currency

Positions

As with other markets, there are two major types of positions, long and short. Unlike other markets, it is just as easy to enter short positions as it is long positions. While trading in the stock market, you can usually only make money when the market is doing well, in Forex, people make money when their native currency is doing well or poorly.

The more common position is called the long position. Entering a long position simply means exchanging the quote currency for the base currency in hopes that the value of the base currency will increase relative to the quote currency. For example, if you think the Canadian dollar is going to do well in the next several months, you might enter a long position in the USD/CAD currency pair. This would mean you exchanged your US dollars for Canadian dollars.

If indeed you were correct, when you exchange the Canadian dollars back to US dollars, you will have more than you started with. If, on the other hand, the price declines, you will have lost money. Entering long positions is referred to as Buying, and exiting them is referred to as selling.

An alternate position to enter is the short position. When entering a short position, you hope that the price will decline. It is not absolutely necessary to understand how short positions work in order to use them, but the basic idea is that you take out a loan in the base currency and immediately exchange it for an equivalent amount of the quote currency. When you exit your position, you simply buy enough of the base currency to pay back the loan, and whatever you have left from the original exchange is profit. On the other hand, if you do not have enough to pay back the loan, you have to cover it from your account.

Because short positions could put you into debt, when you enter a short position, money from your account is generally put on hold to ensure that the broker can claim the money you owe. Ultimately, the goal of entering a short position is an expectation of a price drop. Entering a short position is referred to as short-selling and exiting one is referred to as buying-to-cover.

Market Orders

Market orders are an order to enter or exit a position live at the current market price. If you are selling or short-selling, this occurs at the bid price. If you are buying or buying-to-cover, this occurs at the ask price. Because the market can behave unexpectedly and because a person cannot monitor the market at all times it is open, orders are generally placed with some type of exit strategy.

Limits and Stop-Losses

A limit is placed on an order in an effort to take some profit once it is reached. When in a long position, the limit is some price higher than the entrance price. For a short position, the limit is lower. Once the limit price is reached, the position is automatically closed and the profit is realized. Knowing when to take what you can get is important for successful trading.

A stop-loss is placed on an order in an effort to cut losses before they get out of control. For long positions, the stop-loss price is lower than the entrance price and for short positions, it is higher. Knowing when to cut your losses before they get our of control is just as important as taking profit. In fact, many traders argue it is more important. Investing isn't so much about winning more, but losing less.

Knowing when to place orders and which orders to place is an art (or science) that takes a lot of getting used to. No investor has a full understanding of how prices will change in the future, so it's really just a matter of getting it right more often than you get it wrong. Before you start trading with your hard-earned cash, we recommend opening a demo/practice account with a broker to get a feel for Forex trading.

But before you go making trades, stick around and learn some more. Learn about Trading on Margin, one of the unique advantages of trading Forex.