Market, limit and stop orders are are commonly used in the Forex trading market and to understand any one you also have to have an understanding of the other two. Let’s first take a look at market orders.

A market order refers to an order that an investor places to execute a trade at the current market price. Keep in mind that the concept of ‘current’ could very be quite different from that of ‘current’ in stock markets. In the Forex markets the changes are so rapid that the ‘current’ price can change in a flash.

Because the Forex markets are so extremely volatile, most market orders could have a marginal to a significant deviation from the price indicated on the investor’s screen. Unlike the stock market where you can place an order to sell a stock for a fixed amount and you can be sure you will get the quoted price; in the Forex market the likelihood of getting your asking price is small; at least a small differential is almost inevitable.

In order to offset the inherent difficulty in determining the correct market orders, it is necessary to have limit orders as well as stop orders.

Putting Market, Limit and Stop Orders to Good Use

A limit order is essentially a request to ensure that you will not purchase for anything more than or sell for anything less than the limit price.

Here’s a small example that will clearly explain how market, limit and stop orders can be used practically in the Forex market:

If the market rises to $1.1955 after you’ve purchased euros at $1.1905, you can take the opportunity to book in at least a minimum profit of 40 pips by placing a limit sell order of $1.1945 on your euros.

On the other hand, perhaps you wish to purchase a currency, say British pounds (GBP) and the current price of $1.7750 is too high for you. Placing a limit buy order for buying GBP at $1.7705 would indicate to your broker that you wish to buy GBP but the maximum you are willing to pay is $1.7705 per pound and nothing more.

This would typically have a specified time limit and if the price either does not rise or drop to the limit price before the expiry of the time limit, then the limit order is deemed expired and unfulfilled.

The main difference between a stop order and a limit order is that a limit order indicates an order to sell or buy at a minimum specified price or something better whereas a stop order indicates an order to sell or buy only when it reaches a specified price. After that, it is considered a market order, which means it is now subject to market fluctuations.

A stop-limit order is a combination of both- a limit order and a stop order. In a stop-order, your order gets executed when the market reaches a pre-determined price. It now becomes a limit order, which means your order will only get executed at the pre-selected limit price or anything better.

Market, limit and stop orders are valuable tools for any amateur investor who wants to dabble in Forex trading. Knowing how to leverage these concepts to your advantage can give you a definite competitive edge even amongst he more experienced Forex traders.

Understanding the Concept of ‘Margins’

Because of the large amounts of money that changes ownership at every trade, most of the players in any Forex trading market will include larger organizations and corporates and even governments. Individual investors can find it almost impossible to find that kind of money to go up against such powerful adversaries. In order to give them a toehold into the Forex trading market, many brokers allow their clients to invest in the Forex market on something called a ‘margin’.

This means that the broker will give the client a short term loan of up to 99% of the required total amount if the investor can come up with just 1% of the total. If this may sound too good to be true; it is. If all goes well, the investor as well as the broker come out of the deal smiling.

Understanding the Concept of Margin Calls

However, these deals can also go sour and result in what is called ‘margin calls’- not a very nice scenario for the investor. If you, as the investor wish to invest in euros in anticipation that it would rise against the dollar, you would need to pay the broker 1 % of the total cost you wish to invest; the broker puts in the balance 99%. If the euro gets devalued against the dollar in the ensuing days the broker may debate the wisdom of letting the investment ride. At some point if the broker decides that the money he has loaned you is at a high degree of risk, he can decide to make a margin call. This means that your investment will be sold off at lower than the buying price and you are obligated to make up to the broker for the loss he has suffered.

Tips & Strategies for Avoiding Margin Calls

Only deal with brokers you know and trust – While you do not have to be back-slapping buddies or intimate friends with your broker, it is important that you know enough about him to be able to trust him. Don’t make the mistake of trading in a good, trustworthy broker for a flashier one who promises you the moon; you could very well find yourself hearing far too many margin calls for comfort.

Maintain a healthy credit – Be realistic about your financial status and avoid jumping into the deep end of Forex trading using all your savings. Forex trading is too volatile for small players. If you absolutely must; make sure you only limit yourself to trading with money that you can afford to lose.

Keep an eye on the market – In fact keep both eyes on the market. Currency prices are extremely sensitive and will fluctuate quicker than you can imagine and with the huge sums involved, even a marginal fluctuation can result in an overwhelming loss.

If you intend trying your hand at Forex trading, the best advice you can get is to stay ever sharp and diligent in order to avoid getting crushed by margin calls.

Calculating Pivot Points

A pivot point is essentially the mathematical average of three prices; the closing price of the current day, the low of the previous 24 hour period and the high of the previous 24 hour period.

The formula for calculating pivot points is Pivot Point = (H+L+C)/3 where L is the low for the preceding 24 hour period, H is the high and C is the closing price of the current day.

Because Forex trading is done round the clock, determining the value of C can be pretty tricky. In order to avoid any confusion, 4 p.m., which is the closing time of the New York Forex market is considered as standard. This number, which is typically denoted as P is used along with support points and resistance points to form the base of any Forex trading strategy.

The formula for calculating resistance and support points is as follows:

R1 = (P x 2) – L

S1 = (P x 2) – H

R2 = P + (R1 – S1)

S2 = P – (R1 – S1)

Although Forex traders differ in their methodology, the key to successful Forex trading is determining the optimum price for the support and resistance levels. Some traders prefer basing their trade on the pivot point itself whereas others would prefer opting for the previous day’s closing price.

In a bullish market where the price moves higher than the pivot point, the pivot point becomes the point of resistance whereas in the reverse trend where the price moves below the pivot point, the pivot point becomes the support point.

How Pivot Points Are Used In Forex Trading

Understanding pivot points is the key to successful Forex trading. Besides helping traders to evaluate trends, knowing the pivot points can be extremely useful in developing any entry and exit trading strategy.

Investors typically place orders to buy any currency pair when the price breaks through the pre-determined resistance point. In the event that the prices moves below the pre-determined support level pivot points help in determining a stop-loss price.

While it is not advisable to rely solely on a single indicator in Forex trading, pivot points have proven to be pretty reliable especially when used in combination with other technical indicators including MACD (Moving Average Convergence/Divergence).

The effectiveness of pivot points is attributed to two observed tendencies:

1. When the day’s prices start higher than the pivot point, the prices typically tend to stay higher than the pivot point until such time that it hits the day’s first resistance point.
2. If the day’s prices start below the pivot point, the tendency is to stay lower than that point until such time that it reaches a support point.

Often referred to as ‘trading between the lines’ the approach is quite popular with most Forex traders, while some still view it with some skepticism. While the degree of the influence of pivot points may be debatable, there is no doubt that pivot points do play an important role in Forex trading.