Don't Baby-Sit Your Trading Screen All Day:
How to Use Market Orders to Manage Your Trading

Posted 06/05/2009, 9:00 am EST by Sean Hyman from worldcurrencywatch.com

Everyone knows the Forex market moves fast. In response, professional Forex traders have a reputation for monitoring their trading screens 24/7, so they don't miss out on a single trading opportunity.

Perhaps you're a day trader who enjoys that kind of minute-to-minute action. If so, then that trading style may appeal to you.

But if not, then let me assure you that you can still trade in the Forex market, and you don't have to sit in front of your computer screen all day.

Indeed, you can take advantage of the longer-term currency trends and place your Forex trades in such a way that you can grab the opportunities you want - at the right price.

It comes down to the type of order you want to place. In the Forex market, there are three main types of orders: market, stop, and limit orders. Today, I want to explain how you can use these types of orders to manage your Forex trading, so you don't have to monitor your computer screen all day.

The Most Common Type of Order: "Buy Now!"

You're probably most familiar with the first type of order, known as a "market order." A market order simply says to buy (or sell short) a currency pair immediately. It's an order that is good to use when you are ready to buy NOW at the current market prices.

As you can probably guess, this type of order doesn't help you steal time away from your computer. But it does let you buy in immediately, if you do happen to see a price on your trading screen that appeals to you.

The upside to this order is that you will definitely get your order filled quickly. However, the downside is that you can't specify exactly at what price you want to buy that pair at.

Tip: To get the best market order fills, use only the largest Forex dealers (brokers) available. A larger dealer will have access to more liquidity from the inter-banks than will a small dealer. Also, use a highly regulated Forex dealer, so you get the best fills possible.

How to Instruct Your Broker to Enter & Exit Only on Your Terms!

The second type of order is called a "limit order." You can use limit orders in two different ways: you can use them to enter a position or add to your present order as the level to exit the trade at.

The easiest way to think of a limit order is that it lets you specify the pair's price, but not time. So technically, you get to enter or exit a position on your own terms, at the price (exchange rate level) that you specified.

The order will simply sit there until the exchange rate reaches your price. This type of order can be good for several reasons. First of all, I like limit orders because you can technically enter or exit a trade automatically when the exchange level reaches the right price - even if you're away from your computer.

I also like to have a limit order in so that my dealer has instructions already placed just in case something happens and I can't get back to my computer (or my computer dies etc - it can happen).

I also like limit orders because the Forex market can move faster than I can respond to it. For instance, sometimes there are quick spikes up or down that can trigger a limit order that's already in place. But sometimes, you can't catch a spike up or down quick enough by the time you see it and manually try to execute a market order.

This can come in very handy - especially in a volatile market like we've seen lately.

It's a 24-Hour Market, So Trade in Your Sleep

Let me give you a quick example of how this works. This past Sunday night, I wanted to short the EUR/GBP (euro/pound pair) if the price reached a certain level.

Unfortunately, it was late, and I had to go to sleep. So I put in a limit order as my entry price even though I thought it was unlikely that the exchange rate would hit my desired price.

But lo and behold, I woke up to find out that the exchange rate did hit my limit (entry in this case)! I was up US$1,000 on my three lots. What a way to wake up!

As it turns out, an ECB official had mentioned there could be more rate cuts coming (in his opinion) for the Eurozone. That crushed the EUR/GBP pair for a quick 300 pip drop. If I hadn't had the limit order ready, then I would have missed a US$1,000 trade. I literally made money while I slept because of it.

The limit order to enter a trade on your trading station is commonly called an "entry order." That was what I placed. However, you can add in a limit to your present order and that tells it how to exit out of the trade.

A few Sundays ago, a few friends and I were all trading on a Sunday night as the market opened up. We were all instant messaging each other so I knew we all placed the very same trades. As a habit, I put in a limit order of where I would want to exit the trade in case the pair quickly reached my price. My friends didn't bother with limit orders. They were just monitoring their trades.

The pair spiked high for literally only a second or two. However, it was a very high spike due to the low liquidity that is common when the market first cranks back up for the week.

Therefore, I got out of the trade faster than the rest of the other guys. While they fumbled to hit the close button fast enough, my trade automatically closed. As a result, I made about 50 pips more than they did because my limit order was already in place, and they missed the spike altogether.

Experience taught me to put in the limit. It literally paid me to do so in that case.

Tell Your Broker to Cut Your Losses, Even When You're Away From Your PC!

Everyone needs to have an exit plan if your trades aren't going your way. That's what a stop order is. A stop order tells your FX dealer (broker) to cut your losses immediately, whether you happen to be watching the market or not.

Tip: Figure out where you would exit your trade if you were wrong BEFORE you enter the trade.

You always want to do this beforehand, because that's before you're emotionally tied to the trade. It's easier to think clearly when you figure out an exit plan before you enter the trade.

Your stop order may be a specific level on the charts where you'd draw the line and know you were wrong. Or it could be a certain percentage of your account balance that you would risk on the trade. Whatever you do, don't say "Ah, I'll figure that out later." If you do, you'll likely choose wrong.

If you're buying a currency pair, then your stop order will always be below your entry price. However, if you're shorting a pair, then you're betting the currency pair will sink lower in value. So in that case, your stop level would have to be above the present price, because you lose money as the pair increases in value.

Additional tip: Remember that almost no one will call a top or a bottom. Therefore, expect a trade to move against you a little bit. Therefore, make sure you give your trade some wiggle room when you are trading.

The worst thing you can do is to set a stop very closely. Do that and you'll never make any money - particularly if you're trading a volatile currency pair. For instance, say your currency pair usually moves about 300 pips in a day. If you set your stop loss a mere 30 pips away, then your stop loss will almost certainly be triggered, and you won't make any money.

So make sure the stop distance fits the volatility of your pair also, because some pairs will only trade 100 pips a day while others will trade three times that amount each day. Take that into account when setting your stops.

Finally, remember that EVERY trade needs a stop. If not, you are saying that you are willing to risk your entire account balance on each and every trade. That's a recipe for failure.

Use your stops and limit orders carefully, and you can easily get away with trading on your time - rather than monitoring the Forex market all day, every day.

About the Author: Sean Hyman spends his days teaching his fellow professionals in the industry how to trade the $4 TRILLION currency market. Now he brings his 15 years of financial experience to you. From long-term currency strategies, to quick FX-trading moves usually reserved for the professionals, Sean will tell you everything you need to know to succeed in the currency markets.