How to Effectively Place Your Trading Orders

By Kathleen Brooks, Brian Dolan

Currency traders rely on orders to take advantage of price movements when they’re not able to personally monitor the market and also to protect themselves from adverse price movements. If you’re going to be trading currencies, odds are that you’ll be relying on orders as part of your overall trade strategy.

The two main types of orders are limit orders, used to buy or sell at rates more favorable than current market prices, and stop-loss orders, which are used to buy or sell at worse rates than prevailing levels. The key difference between the two types is that you generally want your limit orders to get filled, but you don’t want your stop-loss orders to be triggered.

That’s because limit orders are used to take profit and enter positions (which you want), and stop-loss orders are used mainly to exit losing positions (which nobody likes). (The exception is stop-loss entry orders, in which you use a stop-loss order to enter a position — on a breakout, for example.)

The risk with using orders is that you miss having your take-profit limit or entry orders filled or that your stop-loss orders are triggered at extreme price points. The catch here is that markets have a penchant for going after stop-loss orders and shying away from limit orders in the routine noise of daily fluctuations.

That makes where you place your orders a critical factor in your overall trading strategy. Deciding where to place orders is definitely more art than science, and even the most experienced currency traders continually grapple with the question of where to place their orders.

Factoring in the dealing spread with orders

Online currency traders face two other complicating factors: the dealing spread of the currency pairs and the order execution policies of online currency trading platforms.

Most online platforms execute on the basis that a limit order to sell is filled when the bid price reaches the order rate and a limit order to buy is filled when the offer price reaches the order rate.

In the case of stop losses, a stop-loss order to sell is triggered if the bid price reaches the order rate, and a stop order to buy is executed if the offer price reaches the order rate. In both cases, the dealing spread works against the order, and traders need to take that into account.

For example, you may be long USD/CHF at 1.0250 with a limit, take-profit order, to sell at 1.0330 and a stop-loss order to sell at 1.0200. For your take profit to be executed, the dealing price must print 1.0330/33. If the highest price quoted is 1.2329/32, no cigar.

Your stop loss would be triggered if the dealing price ever trades at 1.0200/03; if the lowest quoted price is 1.0201/04, your order is still alive. As you can see, it’s frequently a game of inches played out in milliseconds.

Factoring in technical levels when placing orders

Many traders focus on technical levels to decide where to place their orders. Continuing the order example from the last section, if there is resistance from a trend line or hourly highs at the 1.0330 level, many other sell orders could be grouped there. If the selling interest is strong enough, the market may never get that high because sellers step in front of the resistance level, start selling, and stop prices from rising.

In the case of the stop-loss level, it may be placed on Fibonacci retracement support or recent daily lows, which may also attract other technically minded traders to place their stops at the same level.

If the market starts to move lower, sellers will frequently try to test key technical-support levels to see if they hold, in the process triggering stop-loss orders left at those levels. The stops may be triggered and the level exceeded briefly, only to see prices rebound and the support ultimately hold.

Getting stopped out at a market top or bottom is a very frustrating experience, but it’s happened to everyone at one point or another. Someone has to sell at the low and buy at the high.

Margins of error and market extremes

One way to prevent getting stopped out by market extremes is to factor in a margin of error when placing your orders. Using a margin of error is a fairly sophisticated practice, but the idea is to err on the side of getting your limit order filled — leaving a sell order a few points below key resistance levels or a buy order a few points above support levels.

At a minimum, the margin of error should account for the dealing spread of the currency pair you’re trading.

For stop losses, the concept is to err on the side of not allowing your stop to be triggered — leaving a stop-loss sell order several points below key support levels and a stop-loss buy order above technical resistance levels.

In both cases, the margin of error will depend on the relative volatility of the currency pair you’re trading as well as overall market volatility at the time. Generally speaking, the greater the volatility, the greater the margin of error, and vice versa.

Using a margin of error in placing orders will also require you to rethink the overall trade strategy, especially in terms of position size. If you’re going to place stops with a margin of error, and the stop ends up getting triggered anyway, your losses will be greater. So you may need to reduce the position size to mitigate the impact on your margin.

Placing stop-loss orders based on technical or financial levels

There are generally two schools of thought when it comes to the basis for deciding where to place stop-loss orders:

  • Technical stops: Placing a stop-loss order according to price levels identified through technical analysis. Whatever technical approach you choose to follow, you’ll be looking to identify key technical points that, if exceeded, will invalidate the trade setup and signal that it’s time to get out of the trade.

  • Financial stops: Based on the amount of money you’re prepared to risk on a given trade. You may base the trade on a fundamental view of future developments, but you’re willing or able to risk only a certain amount of money on the trade.

Financial stops may be appealing to highly conservative traders who don’t want to risk more than a fixed amount on any single trade. If that’s your way of maintaining trading discipline, by all means go with it. Note that financial stops are essentially arbitrary and have no relation to the market. They’re much more a function of position size and entry price — elements you control — than any objective market measure.

Technical stops, on the other hand, are based on past price action, which is about the only concrete way traders have of gauging future price movements. If GBP/USD has repeatedly failed to trade above 1.6215 in recent weeks, to pick a random price as an example, a move above that level suggests that something has changed.

And the market, in its infinite wisdom, has decided that GBP/USD should move higher. You have no way of knowing for sure whether the break will be sustained; you can only go with your best analysis.

Base orders on technical levels rather than financial considerations, but the ultimate limiting factor is the amount of money at risk.