David Waring

In our last lesson we finished up our discussion on the logistics of leverage in the forex market with a look at how to calculate your leverage ratio when the US Dollar is not the Base currency in the pair. In today's lesson we are going to continue our free forex trading course with a look at the main types of orders used when trading forex.

The most basic type of Order when trading the forex market or any other market for that matter is something which is known as a market order. If you have been following our lessons up to this point you should already have executed several trades on your free real time demo accounts by clicking on the dealing rates window. When doing this you are executing what is known as a market order, which is defined as an order to be executed at the current market rate.

The advantage of a straight market order is that you pretty much will always be filled on your order at some price. The disadvantage of a market order is that you can be filled at a price that is way off the price that you clicked in the dealing rates window. Since the forex market is such a liquid market this is not normally an issue but is something that we need to be aware of, especially when trading around news announcements or other volatile times in the market. During these times orders can be filled at prices which are significantly different than the price the trader clicked, something which is known as "slippage".

To quickly demonstrate a straight market order lets pull up our free real time demo trading accounts and execute a trade. If you have not done so already I encourage you to pause this video now and register for a free real time demo account at the link above this video if you are watching on InformedTrades.com or to the right of this video if you are watching on YouTube so you can follow along as well.

Once you have logged into the platform choose a currency pair that you wish to trade and click in the dealing rates window to bring up the market order window. Notice in this window the bottom line which says "at best". This is how we know this is a true market order, as this means that the order will be done at "the best" available price in the market. In the forex market this normally means you get the price which you clicked, however as we just stated there are exceptions to this where slippage is an issue.

For those who want to protect themselves against slippage when using a market order, which in my opinion is a good idea, this particular platform allows you to change the at best line to "market range". Go ahead and do that and once this is done you should see a new box appear beside the market range box which allows you to enter a number. What this does is allow you to specify the number of points of slippage that you are willing to accept on the trade in order to be executed.

If for example you set this number to zero then you will either be executed at the price you clicked or better, or not at all. If you set this number at 2 then you will be executed within two points of the price you clicked on or better or not at all, and so forth and so on.

This is one of the things that I like best about this platform, as it allows you to tailor the amount of slippage that you are willing to accept, instead of having to choose between either no slippage and unlimited slippage.

Thats our lesson for today, in tomorrow's lesson we will cover what is perhaps the most important order of all, the stop loss order, as well as something which is known as a limit order so we hope to see you in that lesson. As always if you have any questions or comments please leave them in the comments section below, and good luck with your trading.

kawola17

Hello David,

Thank you for all your videos!

I know the amount of slippage depends on many factors. But what do you think or what is a recommended amount of slippage? ( I saw that you put it at 2 in your video. And is the 2; 2 pips??)

Thanks in advance.

Sincerely,
Bill

David Waring

Hey Bill,

Yes the number in the box represents the number of pips of slippage that you are willing to accept.

In general, because the FX market is so liquid (meaning there are huge amounts of currency traded every day), you will receive very little if any slippage regardless of what the box is set to. Two exceptions to this would be if you are trading around a news event, or if you are trading a large sized position (+5 Million) in off hours in some of the less liquid pairs like NZD/USD.

With this being said I think the amount of slippage that traders are normally willing to accept depends primarily on their profit target. If for example a trader is scalping the market for 10 pips a trade, then 1 pip slippage is 10% of their profits so they may not be willing to accept any slippage. If however a trader is targeting 500 pips then a few pips slippage probably does not make much of a difference to them.

Let me know if there are any other questions.

Best Regards,
Dave

prolog

Hi David

My account size is $10,000

Since the leverage is 200:1, the used margin is $50.


The question is, how do I set custom leverage when I create a market order?




Suppose I want 10:1 leverage and the used margin to be $1000 with the contract size of 10,000. (rather than $50 margin with 200:1)

Tekmnd

Hi Prolog,

You got my long-winded answers for all your questions today lol.
You decide how much leverage you use by just not trading with more money.
You have 200:1 leverage, so the broker will set aside a minimum amount of your account- 1/200th of your contract. If you want to lower your leverage, you simply mentally set aside more of your account by not using it. It is more of a self-discipline thing than an actual physical setting. Hope this makes sense.

Cheers
Tek

prolog

Thanks again Tek
Two words "You rock!"

How do I set aside part of my account?

I hope you can clarify my confusion



I posted another question related to leverage and used margin
How to Calculate the Amount of Leverage Used in a Forex Trade

Tekmnd

Ahh, you are up early as well lol

You set aside part of your account simply by not using is. It is a self-discipline thing, not a physical setting.
Keep in mind that the broker will allow you to trade with more leverage than you should use. If you over leverage yourself (over extend yourself and buy way too much) and get called out on margin (the broker is forced to sell off your positions), the broker makes money.

It has also been said that on smaller newbie accounts, like a micro account like I have, the broker even gives you more leverage (my micro account can be traded on a much as 400:1 leverage) because the broker knows that over 90% of new traders blow out their first account.

Therefore, it is an over 90% probability trade if the broker takes the opposite to your trade (you buy a currency pair, and your broker is the one that sells it to you knowing that they have over a 90% chance you'll lose and they will win).
If they give you extra leverage, and allow you to over-extend yourself, the odds that they will win, and you will lose goes up (much like a casino allowing you to open a line of credit when you are losing lol).

Cheers
Tek

David Waring

Hey Prolog,

Looks like you and Tek have some great dialogues going here which is great to see as that is what this site is all about, traders learning from each other.

To add to what Tek has said here again here is an example that may help clarify.

If I have $10,000 in my account, my account is set at 200 to 1 margin, and I open 1 10K position of USD/JPY then I am using no leverage. The reason why here is because I have $10,000 in my account and I have 1 position open which is worth $10,000. So in this example, while the minimum margin requirement is 200 to 1 I am leveraged at 1 to 1 becauase I am trading exactly the same position size as I have cash in my account.

If, continuing this same example, I open another 10K position of USD/JPY then I have $10,000 in my account and $20,000 of open positions in the market. So in this case my leverage is 2 to 1.

So this is what Tek means by you manage the leverage on your account with the number of positions you open in relation to the amount of money that you have in your account.

Hope that helps.

Best Regards,
Dave

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

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