As a trader, you have a multitude of options when it comes to order types in the forex market. Traders who are already familiar with the stock market might find similar order types on the forex market. However, there are newer order types on the shelf that can be released in the near future. Thus, as a trader, you always have to be on the lookout for new order types.
Some Common Order Types in the Forex market
The two most common types of orders used by beginners are Market Orders and Limit orders.
In the forex market, limit orders are also known as take profit order and are common in both retail and wholesale currency markets. You can place a limit order at a specific level. It will then only get triggered when the market moves to that level or crosses it.
Limit orders are of two types: “If done orders” and “loop” orders. If done orders are a special type of limit order than creates a new order once executed. A loop order is similar to an if done order with the only difference being that it creates orders in loop one executed, instead of another single order.
Market orders are another very common type of order used in the forex market by newcomers. They are mostly applied for large transactions, wholesale in nature. Here, customers give an execution order to a bank, to handle a large specified amount in the best way they see fit. In this case, the market maker gets the ability to judge liquidity. If you trust the counterparty you are trading with, then market orders are an efficient order type.
Order Types not used by Rookies that can improve your FX trading
In this type of order, the customer asks the bank to show them an offer and a bid on a set amount. Since the bank has no idea whether the customer is going buy or sell, it shows the customer both sides. The customer then takes the decision whether or not to deal and if they do, which side they will deal with. There are standard spreads for two-way quotes in each currency at any given point of time. However, the spreads can change frequently, depending on the time of day, the prevailing market conditions, as well as the skill of the market maker. For instance, a spread in a quiet market is generally narrower than that in a fast market.
No worse than the price
The no worse than price order applies solely in the case of the wholesale forex market. In this order type, a customer or corporation asks a bank for the least price that they would be willing to sell a very large amount of Forex. This is called “no worse than price”. For instance, if a corporation wishes to sell 300 million USD/EUR but is worried about the market moving against them, they can use a no worse than price order. The bank provides “at worst” prices. In case the actual execution is significantly more than the “at worst price”, the bank is obligated to share the improvement with the customer. This order type is halfway between risk price and at best.
OCO stands for one cancels the other. This type of order involves a trader sending a take profit as well as a stop loss for the same position. The conditions are such that if one side gets executed, the other side is instantly canceled. OCO orders can be used if a trader leaves his/her desk while they have an open position. They pass an OCO order so that their stop loss and take profit levels are watched. If anyone side trades, the other side is canceled.
Dark Pools are an order type available exclusively in the wholesale forex market. In this type of order, traders first show an interest to purchase or sell a particular amount of currency. However, they do not assign any price to the order. The order is then sent to a “dark pool” where it will wait until someone matches it in the opposite direction. When matched, both sides of the trade are filled at mid-market. One of the reasons why dark pools are becoming popular is that traders can transact in the market without showing their interest.
Time-weighted and Volume weighted Price
Time-weighted price (TWAP) and Volume weighted price (VWAP) are both algorithmic orders used generally in wholesale FX transactions of large quantities. The orders are managed electronically, by dividing up a large order and allocating them into the smallest pieces which are then executed over a given time period.
TWAPs can be ideally executed when the market is not moving, or when the trader expects the market to move gradually in the favour of a trade. Thus, if you need to buy when you think the market will grind lower, use a TWAP. VWAPs are similar to TWAPS. However, they differ in the sense that the amounts executed are divided into pieces that match the level of the volume being transacted in the market.
What are the Iceberg Orders? How are they used in wholesale FX?
Iceberg orders are a special type of limit order which are exclusively used in the wholesale forex market. An iceberg order only shows a small amount to the market. However, until a large amount has been filled, it automatically refreshes the order.
For instance, a market maker is given 130 million worth of NZD/USD at the price of 0.6640. When the market is trading at 0.6644/46, the trader wants to reduce his level of risk by selling 50 million NZD/USD at 0.6645. The trader feels that he might scare the market if he shows the entire 50 million order for such an illiquid currency pair. To use more stealth and not disturb the market, he uses an iceberg order. He fixes it to sell 50 NZD in clips of 5 NZD at a time, at a price for 0.6645. As a result, the market sees an order for just 5 million NZD at 0.6645. However, as soon as one trades on that order, it will refresh to show another 5 million. This will be continued until the trader’s entire 50 NZD is sold.
Several types of orders exist in the forex market. There are some orders which can easily be executed by beginners and novice traders. There are of course other order types that would require some advanced knowledge and experience to grasp.