What are FX Orders?
In the simplest form, FX orders are the instructions given to FX dealers that dictate how and when you want to exchange currency. FX orders come in a variety of different types, all of which can result in vastly different outcomes. Whether you're looking to buy or sell, understanding the distinctions among market order types is paramount to determining which order is best suited to achieve your personal goals.
At Moneycorp, we have three available options for FX orders:
- Limit Orders: If you're looking to purchase currency at a value better than the current exchange rate then a limit order is the way to go. This type of FX order is best used when you believe that a positive, upward trend for your required currency is to be expected. Simply set the desired exchange rate and, if/when the market reaches that point, your exchange will automatically go through.
- Stop-Loss Orders: The opposite of limit orders, stop-loss orders are used when you're expecting the rate to move against you. This type of FX order is best used to help mitigate your risk of exposure to fluctuations in the currency market by ensuring that you don’t suffer from worse exchange rates than what is originally expected.
- OCO Orders: An OCO order, or “One Cancels the Other Order,” is a combination of both the limit and stop-loss orders. This type of order places both a target limit level above and a stop-loss level below the current exchange rate. With OCO Orders, your order is executed if your rate moves up to the limit or moves down and hits your stop-loss level.
Understanding Limit Orders
As mentioned previously, limit orders are preferred by those who want to buy or sell currency at a specific price. These types of orders are particularly helpful in fast-moving markets where rates can change quickly. The obvious benefit to limit orders is that you can set a maximum and/or minimum price that you are willing to pay.
However, as with any order, there are some potential downsides. With limit orders, there is no guarantee that your desired rate will be reached and, if that happens, your order goes unfulfilled and you potentially miss out on the opportunity for a beneficial exchange.
For example, if you're purchasing a home in Portugal and the current exchange rate is 1.1660, having a limit order in place would allow you to take advantage of the rate in the case that it drops to 1.1610.
You should use a limit order when:
- You want a specific price and are willing to wait to reach it.
- You don’t want the market to move and reduce your savings.
Understanding Stop-Loss Orders
In simplest terms, a stop-loss order is often considered a free insurance policy. Unlike limit orders, the main purpose of stop-loss orders is to reduce the risk of exposure and limit potential losses that may be incurred during a currency trade. Similar to having an exit strategy, a stop-loss is an offsetting order that allows you to exit the market once a specified price level has been reached.
For those looking to implement a stop-loss order, it's important to understand that the location of the order is just as important, if not more important than the order itself. The ideal location for a stop-loss order allows for day-to-day fluctuations to occur in the market while still ensuring that you can get out of your position if the market has a substantial turn against you.
Keeping in line with the example above, if you're purchasing a home in Portugal and the current rate is 1.1660, setting a stop-loss order would ensure that, if the rate reaches 1.1710, you could save a significant dollar by automatically exiting before you lose more money to forex market fluctuations.
You should use a stop-loss order when:
- You anticipate a substantial price movement against your currency trade.
Understanding OCO Orders
Implementing an OCO order is an easy way to “automate” your exchange rate trade. The most advanced of the three orders, OCO allows individuals to essentially link two separate orders, most often a limit and a stop-loss order.
These two linked orders take root on either side of the prevailing market price and, as soon as one is executed, the other will be canceled. For those who may have time constraints or simply don’t want to waste time monitoring market movements, OCO orders allow you to easily define your risk and reward lines, ensuring that you take advantage of positive currency fluctuations while also protecting yourself from foreign currency exposure.
Lastly, if you’re purchasing a home in Portugal and the current exchange rate is 1.1660, an OCO order would allow you to define both your limit order and stop-loss order. By placing a limit order, you could take advantage of the rate if it drops 1.1610. At the same time, by also placing a stop-loss order, you could save yourself a significant amount of money if the rate reaches 1.1710.
You should use an OCO Order when:
- You don’t have time to continually monitor exchange rates.
- You anticipate a significant move in the market but aren’t sure which direction.
The Bottom Line
Whether you’re an individual looking to get the most out of your money or simply looking to minimize your risk to currency fluctuations, understanding how and when to use different FX orders is an essential part of any currency transaction. At Moneycorp, we offer a wide range of solutions for all your currency transaction needs. Contact our team of dedicated foreign exchange specialists today to learn which order is right for you.