Market Order, Stop Loss Order and Limit Order

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What are Market orders?

A foreign exchange market order is an agreement to acquire currency at a set currency exchange rate of your choosing, with the trade being executed if and when the desired foreign exchange rate is accomplished. This gives you an exchange rate you are satisfied with and guarantees you won’t need to monitor the foreign exchange marketplace or fret about your currency exposure. Market orders are suitable if you need to make repayment without any immediate pressure. 

There are 2 types of market orders: stop-loss orders as well as limit orders.

What is a foreign exchange limit order?

A limit order is when a client nominates an exchange rate they would like to achieve. The foreign exchange broker will then monitor the market and automatically book the transfer on behalf of the client once the specified exchange rate has been triggered.

A limit order is generally more appropriate for people who do not have to transfer money immediately and have the time to monitor the market or are expecting exchange rates to increase.

While a client may specify an exchange rate they would like to achieve to a foreign exchange broker, it is also important to factor in the margin charged by the provider. For example, a client looking to sell GBP 100,000 and buy AUD when the exchange rate reaches 1.90, would also have to factor in the provider’s margin. If a foreign exchange broker charges a 0.5% margin on transfers, then the market would need to reach a rate of 1.9095 for the client to achieve a rate of 1.90.

When a limit order triggers, the foreign exchange broker would contact the client to confirm the transaction and ask for payment to be remitted immediately to their account. The beneficiary bank account details will also be taken so the foreign currency can be remitted to the beneficiary upon receipt of the client’s funds.

A limit order is not a legally binding transaction until the nominated exchange rate is reached in the market. Up until this point a limit order can be cancelled or amended, however, once the market reaches the specified exchange rate the transaction will be booked immediately and thus becomes legally binding.

Of course, there is no guarantee the nominated exchange rate will be achieved and markets may fall or move against the client. Therefore some foreign exchange brokers offer Stop Loss orders whereby conversely the client nominates the ‘worst case’ exchange rate they would like to obtain should the markets continue to fall.

A stop-loss protects clients from further losses should the currency market fall, however not all foreign exchange brokers offer stop-loss orders due to the associated risks.

What is a Stop Loss Order?

A stop-loss order works similarly to a limit order, yet instead of specifying the target rate at which you intend to purchase money, you define the minimal currency exchange rate at which you would be willing to trade. It may seem counterintuitive to establish a rate below what the foreign exchange market is currently supplying, but a stop-loss order makes certain that if the markets turn against you, you will not lose. If, as an example, you know that your budgeting takes into account a certain exchange rate, then you can activate a stop-loss order at that rate, therefore ensuring your financial commitments can be met.

It is worth noting that limit orders, as well as stop-loss orders, can be combined as a component to a company’s currency risk management approach. By placing both contracts in place, you can try and achieve a favourable currency exchange rate (limit order), however, are additionally protecting yourself against negative market fluctuations (stop-loss order). If both are combined, at the point that the limit order or stop-loss order is activated, the other market order is immediately terminated. This combined approach is sometimes known as an OCO order.

What are OCO orders?

An OCO order (or One-Cancels-the-Other order) is a combination of both a limit order as well as a stop-loss order. OCO orders put a targeted limit order level above the existing Foreign exchange rate, as well as a stop loss level below it.

OCO orders determine that if the rate moves up to your desired Foreign exchange trading level, the trade will be automatically activated and your currency will be exchanged at your targeted foreign exchange rate, also cancelling the lower rate stop loss level. Additionally, if the Foreign exchange rate trends down and triggers the stop loss level before the limit order level, your currency trade will be made and also your higher limit order level will certainly be automatically cancelled. 

Why use Market Orders?

The different variations of market orders are required for different objectives. For example, if the GBP to EUR currency exchange rate was 1.130, a limit order would permit you to target a higher foreign exchange rate, such as 1.1650. If this price and your target are achieved, your currency exchange will automatically be made.

Conversely, a stop-loss order would aid you to secure your project from an unfavourable GBP/EUR currency movement, by establishing a stop order for lower foreign exchange rate such as 1.1150. If the exchange rate was to tumble to that trading level, your exchange will once more be automated at that point, no matter whether the rate would continue to depreciate. 

An OCO order is just a hybrid of both market orders. In this exact example, if the price were to fall to 1.1150, your stop-loss order would immediately be activated as well as your currency transfer made, cancelling your limit order. Vice versa, if the rate reached 1.1650, your currency trade would once again be made and would eliminate your stop-loss order.

Arranging a market order with a foreign exchange broker

Once you’ve set up your account with a trusted foreign exchange broker, they will get in touch to discuss your requirements in depth. If you have time on your side and feel the currency pair, you are needing to trade could appreciate your account executive could suggest considering a limit order. If you agree you can dictate the strike level at which you order will be set which will typically include your foreign exchange brokers margin.

If you are combining a limit order with a stop loss you will also be able to dictate the level at which you stop loss will be set. Once agreed and the order is placed within their system, you’ll receive an email confirming the order and the agreed levels plus the amount of currency you are looking to exchange.

Market orders will typically have to be placed over the telephone rather than online and can be cancelled at any moment. If however the limit order or stop loss is triggered you cannot cancel the market order.

Example of a Market Order

Company XYZ limited needs to convert £2 million in US dollar within the next 6 months. At the time of contacting their foreign exchange broker, the GBP/USD exchange rate is trading at around 1.3156. Following consultation with their foreign exchange broker, the CFO of XYZ limited decides to set a limit order for 1.348, believing the rate could appreciate at least 2%. However, knowing the pair could be volatile due to political and economic uncertainties the CFO also implements a stop loss at 1.2892.

Three months later the limit order of 1.348 is triggered meaning that XYZ limited exchanges £2m for $2,696,000. Essentially a saving of $64,800 when compared to the rate available when they initially contacted their foreign exchange broker.

What is a market order?

A market order is a contract to buy or sell a foreign exchange pair or underlying asset at an agreed level. Once that level is set the purchase or sale is executed.

Why are market orders beneficial?

Market orders allow you to capitalise on financial market volatility meaning an exchange rate can be purchased or sold at a rate which benefits you or is more profitable.

Can a market order be cancelled?

A market order to buy or sell currency or an underlying asset can be cancelled at any moment, providing it hasn’t met the targeted rate or strike point.

How can I set up a market order?

Market orders can be set up over the phone with your foreign exchange broker. Once the rate and time frame is agreed you will be sent a contract confirming the order and potential trade.

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