Forex trading involves the buying and selling of different currencies, or rather the trading of one currency for another, as obviously you will be using a particular currency to buy and sell in the first place. The relative value of different currencies shifts all the time. Getting the right price at the right time is crucial for traders hoping to make a profit. Those two factors – price and time – and which you want to prioritize are the driving forces behind two commonly used types of forex (foreign exchange) order, market and limit orders.
Defining an order
An order is an instruction to carry out a trade: that is, to buy or sell a particular currency. It goes from you to your broker or the trading platform you are using and may be carried out immediately or when certain conditions are met. Large orders can take more time than smaller ones, and even though we may only be talking about a few seconds, that delay can be crucial in terms of the price you get. Volatile currencies can drop or go up in price in the time between an order being placed and its execution (the moment it is carried out), so it’s best to keep up to date with the latest market news.
A market order is an instruction to buy or sell a specified currency immediately at the best available market price. In this case, quickly executing the order is more important to the trader than the price they get. It is the most basic form of forex order: a simple “buy now!” or “sell now!”
A market order guarantees that the order will be executed but doesn’t guarantee the price. As stated above, the market price may change between the order being placed and it being carried out, even if that is a matter of seconds. Basically, you are saying you will pay the asking price or sell at the going rate. The advantage is that you will almost certainly get what you want right away, although all orders are subject to availability.
A limit order is an instruction to buy or sell a specified currency only when it reaches a specific price or better. A buy limit order will only be executed when the price drops to a certain level, below the current market value. A sell limit order will only be executed when the price rises to a certain point above the current market value. It is a way of setting a threshold or parameters within which you want to trade. That threshold is known as the limit price.
By placing a limit order, you are saying that you’re prepared to wait until the price is right. In this case, time is secondary to price. There is always the risk that your limit price will never be reached. However, in which case the trade will never be executed. For this reason, limit orders should only be used if you are genuinely only interested in buying or selling the currency at the specified price or better.