Understanding Order Execution in the Forex Market

Today I'm going to explain the different types of market orders in the Forex. I'm also going to explain the difference between the price you see on the charts, and what you're going to buy/sell the currency pair for.  It's important to understand the difference so you don't lose money unintentionally by placing the wrong order.

The Two Ways to Execute an Order

The first is called one cancels the other (OCO). When either the limit order or the stop order is reached it cancels the other. In other words, if you have entered a long position (bought) and your limit order is reached you will automatically sell to protect your profits. By reaching your limit order, you have canceled your stop order (which you set up at a lower price than the entry price in order to minimize losses).

The other type of order execution procedure is called cancel/replace. If you are chasing the market you will be using the cancel/replace execution procedure. As the market continues to move your original stop order is cancelled and replaced in the direction of the market movement. In this way you are locking in your profits as you go.

How to Place Orders Based on Market Outlook

If you are a bull, only cancel and replace to the new last low after the market has made a new high. If you cancel and replace before the market has made a new high, you may be stopped out by a slight retracement.

If you are a bear, only cancel and replace to the new last high after the market has made a new low. Otherwise, you may be stopped out by a slight retracement (the market swings in the opposite direction of the trend but does not break the trend).

What Price Are You Looking At?

As you're looking at your charts, you should know that you are not seeing the entire picture – not all participants in the Forex market are watching the same price. The difference is that buyers are watching the ask price – because that is the price they ask, and sellers are watching the bid price – because that is the price they bid.

Most charts are bid charts, meaning they display the bid price (the candle charts you will be looking at are bid charts). The ask price is typically 3-10 pips higher than the bid price (depending on the currency you're trading). The difference between the ask price and the bid price is called the spread. Some currencies have spreads as large as 100 pips; don't trade these currencies!

Whether you are a bear or a bull, you will be selling on the bid and buying on the ask.

When you set a profit limit to sell you will be selling on the bid, as you will when you set a protective stop to sell. When you set a profit limit to buy you will be buying on the ask, as you will when you set a protective stop to buy.

Remember, in any case you will buy on the ask and sell on the bid. Keep this in mind, as you may need to adjust for it when you're setting your stop loss orders (more about that later).

.