The ability to go long or short is my favorite part about the Forex market. If you recall from the lesson on Forex vs stocks, I mentioned that this is my favorite advantage of Forex over the stock market, because you can profit regardless of whether the market is moving up or down.
In this lesson we’re going to cover what ‘long or short’ means and also cover the different order types at your disposal.
First and foremost, let’s discuss the meaning behind long or short by breaking down each term…
Long simply means to buy. When you’re in a long trade you’re said to have a ‘long position’, which means that you have bought a security or in our case a currency pair. In this type of trade we want the market to rise above the point where we went long (bought).
Short simply means to sell. When you’re in a short trade you’re said to have a ‘short position’, which means you have sold a security or in our case a currency pair. In this type of trade we want the market to fall below the point where we went short (sold).
Simple enough, right?
When you go long (buy) a Forex currency pair you’re actually buying the base currency (first currency in the pair) and selling the quote currency (second currency in the pair). If you buy EUR/USD you are actually buying the Euro and selling the US Dollar. The opposite is true when you short (sell) a Forex currency pair. So in the case of the EUR/USD you would sell the Euro and buy the US Dollar. Of course all of this is transparent and happens in the blink of an eye. Still, it’s important to know this stuff so you have a stronger foundation for when we get into the more technical stuff in later lessons 😉Wait a minute…how do you buy a currency pair? You don’t…well, not technically.
So now we know what the term means, but how do we actually trade long or short? Let’s take a look…
Just as the name implies, a market order is an order that is placed immediately at the ‘current market price’. Your broker will give you the best available current price when placing the order. A market order is guaranteed to be executed, however there’s no guarantee on the price at which it’s executed.
A quick note about market orders. Due to the nature of market orders being placed at the ‘best available current price’, you should always double check the bid-ask spread before placing your order. Occasionally, especially during high-impact news events, the bid-ask spread can be quite large even for the major Forex currency pairs. Placing a market order during these conditions sometimes means that you will get ‘filled’ at a less-than-optimal price, putting your trade at a large loss before the market has had a chance to move.
All of the following long or short order types are called pending orders, meaning they are placed in advance with the belief that future price will react a certain way.
A limit buy order is an order placed with a broker to buy a certain amount at a given price or better. The order is placed below price when you believe the market will come down to a level and then reverse higher.
A limit sell order is an order placed with a broker to sell a certain amount at a given price or better. The order is placed above price when you believe the market will come up to a level and then reverse lower.
A Buy stop is an order placed with a broker to buy a certain amount when price surpasses a particular point. The order is placed above price at a point where you believe the market will continue to rise.
A Sell stop is an order placed with a broker to sell a certain amount when price surpasses a particular point. The order is placed below price at a point where you believe the market will continue to fall.
One thing to keep in mind about buy and sell stop orders, is that once price surpasses the predefined entry level, the stop order becomes a market order. Therefore, think of a stop order as a future market order. The difference being that you can place a stop order today that will only be executed at a future price level, whereas a market order placed today will execute immediately.
Stop Loss Order
The stop loss order is the most important type of order in my opinion. To trade without one is like bungee jumping without a bungee cord. The stop loss is an order that is associated with one of the entry orders we discussed above for the purpose of limiting your losses on any one trade. The stop loss order helps to take the emotion out of trading decisions, which is critical to your success as a trader. It makes it possible to walk away from your computer while in a trade and know that any losses will be limited to your predefined risk, which is what I teach in my Forex price action trading course.
Here is where you could potentially set a stop loss order for both long or short trades.
The best part about stop loss orders is that they allow the market to prove you wrong. There is nothing worse than making an emotional decision to close a trade only to see it run 200 pips in what would have been your favor. Trust me when I tell you that every trader who has made the journey to becoming successful has made this mistake many, many times. Although stop loss orders won’t eliminate emotionally decisions like this, they are certainly a necessary starting point.
Think of the trailing stop order as a standard stop loss order, but instead of being fixed at a certain price, the trailing stop moves with the market. Let’s assume you buy the EUR/USD at 1.3600 with a trailing stop at 50 pips. This means at the time the trade is executed your trailing stop is at 1.3550 (50 pips below 1.3600). Now let’s assume the market moves higher by 100 pips, so the EUR/USD is now at 1.3700 and your trailing stop is still 50 pips below the market at 1.3650. This means you have now locked in a profit of 50 pips. If the market has moves back down to 1.3600 your trailing stop will execute at 1.3650, giving you a profit of 50 pips.
Good ‘Til Canceled Order (GTC)
A good ’til canceled order is an order to buy or sell at a set price and remains active until you either cancel the order or the trade is executed.
Good For The Day Order (GFD)
Just like the name implies, a good for the day order is an order that will be canceled at the end of the day if it’s not filled. The time at which your order will be canceled depends on where your broker is located, so always check with them first.
One Cancels Other Order (OCO)
Again, pretty obvious from the name, this is a set of orders where if one is executed, the other is automatically canceled. This is often used by Forex traders who hedge in order to mitigate risk, however if you’re in the United States, this isn’t an option.
Hopefully this lesson has helped you to better understand the term ‘long or short’ as well as the many order types at your disposal. Not all brokers support the last three order types, so you’ll want to check with a broker before creating an account if you plan to use any of them. In my experience, all brokers offer limit and stop orders, and of course market orders, and most support trailing stops.