Types of Orders
The forex market provides different kinds of orders for trading. The following are some major types of orders that can be found on forex trad
ing stations.
ing stations.
Market orders - A buy or sell order in which the forex firm is to execute the order at the best available current price. It is also called at the market.
Entry orders - A request from a client to a forex firm to buy or sell a specified amount of a particular currency pair at a specific price. The order will be filled once the requested price is hit.
Stop Loss orders - An order placed to close a position when it reaches a specified price. It is designed to limit a trader's loss on a position. If the position is opened with buying a currency pair, the stop loss order would be a request to sell the position when the price fall to the specified level. And vice versa. Traders are strongly recommended to use stop loss orders to limit their losses. It is also important to use stop loss orders when investors may enter a situation where they are unable to monitor their portfolio for an extended period.
Take Profit Orders - An order placed to close a position when it reaches a predetermined profit exit price. It is designed to lock in a position's profit. Once the price surpasses the predefined profit-taking price, the take profit order becomes market order and closes the position.
Good Until Cancelled (GTC) - In online forex trading, most of the orders are GTC, meaning an order will be valid until it is cancelled, regardless of the trading session. The trader must specify that they wish a GTC order to be cancelled before it expires. Generally, the entry orders, stop loss orders and take profit orders in online forex trading are all GTC orders.
The above are the basic orders types available in most of them trading systems. Some trading systems may offer more sophisticated orders. Traders should be familiar with the different orders and make the most of them during trading.
Basic Concepts VII: Margin
What is Margin?
Margin is the amount of equity that must be maintained in a trading account to keep a position open. It acts as a good faith deposit by the trader to ensure against trading losses. A margin account allows customers to open positions with higher value than the amount of funds they have deposited in their account.
Trading a margin account is also described as trading on a leveraged basis. Most online forex firms offer up to 200 times leverage on a mini contract account. The mini contract size is usually 10,000 currency unit, 1/200th of 10,000 equals to 50 currency unit, meaning only 0.5% margin is required for open positions. Compare to future contracts, which require 10% margin for most contracts, and equities require 50% margin to the average investor and 10% margin to the professional equity traders, foreign exchange market offers the highest leverage among the other trading instruments.
The equity in excess of the margin requirement in a trading account acts as a cushion for the trader. If the trader loses on a position to the point that equity is below the minimum margin requirement, meaning the cushion has completely worn out, then a margin call will result. Generally, in online forex trading, the trader must deposit more funds before the margin call or the position will be closed. Since no calls are issued before the liquidation, the margin call is better known as ‘margin out' in this case. The account will be margined out, meaning all the positions will be closed, once the equity falls below the margin requirement.
Example:
| Account | A |
| Account Equity | 500USD |
| Contract Size | 10,000 |
| Currency | EUR/USD |
| Spread | 3 pips |
| Margin Requirement | 50USD |
| Leverage | 1,000:50 = 200:1 |
| Pips to margin out (1 lot) | 447 |
Consider Account A, the margin requirement for 1 lot of position is 50USD. The free usable margin is Account Equity - (Margin Requirement + Spread) = 500 - (50 + 3) = 447. The account will be margined out if EUR/USD moves 447 pips against the position.
Why Margin Requirement Matters?
Leverage is a double-edged sword. With proper usage, it can enhance customers' funds to generate quick returns and increase the potential return of an investment. However, without proper risk management, it can lead to quick and large losses. Consider the following example:
| Account | A | B |
| Account Equity | 500USD | 500USD |
| Contract Size | 10,000 | 10,000 |
| Currency | EUR/USD | EUR/USD |
| Spread | 3 pips | 3 pips |
| Margin Requirement | 50USD | 200USD |
| Leverage | 1,000:50 = 200:1 | 1,000:200 = 50:1 |
| Pips to margin out (1 lot) | 447 | 297 |
| Max no. of lots at one time | 9 | 2 |
| Pips to margin out (max lots) | 3 | 47 |
The initial conditions of the accounts are the same, except for account A, the margin requirement per lot is 50USD and account B is 200USD.
Free usable margin = Account Equity - (Margin Requirement + Spread)*no. of lots
Maximum number of lots open at one time = Account Equity / (margin requirement + spread)
In account A, for 1 lot of position, the free usable margin is 500 - (50+3) = 447, which means the account will be margined out if EUR/USD moves 447 pips against the position. The max number of lots open at one time = (500/(50+3)) = 9 lots, with 500 - (50+3)*9 = 23USD free usable margin left for 9 lots. Once EUR/USD moves 23/9 = 3 pips against the positions, there would be not enough usable margin and account A will be margined out.
In account B, the free usable margin for 1 lot is 500 - (200+3) = 297, which means the account will be margined out if EUR/USD moves 297 pips against the position. The max number of lots open at one time = (500/(200+3)) =2 lots, with 500 - (200+3)*2 = 94USD free usable margin for 2 lots. If EUR/USD moves 94/2 = 47 pips against the positions, account B would be margined out.
With 1 lot of open position, account A has 447USD usable margin as cushion before being margined out, while account B only as 297USD. However, with more usable margin, account A has higher probability of being over traded. As shown in the above example, the more open positions, the easier is the account to get margin out.
Most forex trading firms offer customizable leverage; traders can choose the leverage ratio they feel most comfortable with. Customers should be aware of how to guard against over trading an account and managing overall risk.
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