Order Types & Risk Management
Risk management is imperative when trading in leveraged products. Although leverage creates the opportunity for accelerated profits it also carries the risk of amplified losses.
Traders in leveraged products should have a strong understanding of techniques for risk and trade management to assist in maximising profit potential and limiting losses. This may include additional product or trading education in the form of a course or formal qualification to achieve a strong base level understanding of leveraged products, the market and analysis techniques.
A working understanding of market influences, behaviour and potential risks is important, including the ability to calculate position and trade sizing understand the associated risks of that trade.
A strong base knowledge should be achieved on the trading platforms and software being utilised. This includes knowledge and application of risk management orders for effective management of trades. Traders must also ensure they understand how to easily access account and position information and status of margin requirements. It is up to the trader to manage their positions and risk at all times with the information provided.
Time should be taken to read the PDS and Financial Service Guide to gain a full understanding of the terms and risks associated with the products being offered.
CFD Order Types
The following information provides definitions and examples of order types that can be used to assist in managing risk as well as maximising profit potential. Please note that not all order types are available on all platforms or all products so it is imperative for traders to understand the functionality of the platform and product being traded.
Forex Order Types
A Day order is only valid for the day. It will automatically expire if the price is not met by the end of the trading day*.
* At Phillip, our day end is 5am (SGT) the following day.
A Good Till Cancelled (GTC) order allows the order to be active until market reaches the stipulated price or until the trader decides to cancel it.
A Good Till Date (GTD) order enables traders to stipulate the expiry date of a working order. As the name suggest, the order will work in the system till a stipulated date. Example: You place a GTD order to buy 100,000 GBP/USD at 1.6000 with the expiry date set as 1 March 2010. If the price is not met by the stipulated date, this order will automatically expire.
A limit order is an order that triggers the trade at more favourable levels than the current market price. It allows traders to buy low or sell high. Example: USD/JPY is currently trading at 90.50/52. Use a limit order if you wish to buy lower than the market price (90.52) or sell higher than the prevailing price (90.50).
A stop order is the opposite of the limit order. It allows traders to buy high or sell low and is often used as a stop loss order to limit losses on an open position. Example: You are currently long 100,000 EUR/USD at 1.4550. Use a stop order if you wish to cut loss when market moves against your position and drops to 1.4500.
Stop on Bid/ Stop on Offer
There are 2 types of stop orders – Stop on Bid and Stop on Offer. Essentially this gives traders the flexibility to choose their stop trigger point either on bid or on offer. For Stop on Bid (Offer), this means the stop will be triggered based on the bid price/ selling price (offer price/ buying price).
Example: You place an order to sell 100,000 EUR/USD stop on bid at 1.4550. When the market reaches 1.4550/52, the order will be triggered at exactly 1.4550 (the bid price).
However, if you place the same order to sell 100,000 EUR/USD using stop on offer at 1.4550, when the market reaches 1.4550/52 the order will not be triggered as the offer price is at 1.4552. The order will only be triggered when the offer reaches 1.4550 at which time the market will probably be at 1.4548/50*, and the stop will be filled at 1.4548 (the selling price).
* Assuming spread is constant at 2 pips.
In Forex, slippage occurs when a limit order or stop loss is executed at a lower rate than originally set in the order. Slippage often occurs when volatility, perhaps due to news events, makes an order impossible to execute at a specific price. In this situation, dealers will execute the trade at the next best price.
To manage slippage you can make use of the stop limit order. This order type works similar to a stop loss except that the added limit restricts the amount of slippage received on the trade execution. This order type is available on the CFDTrader, FX365 and MT4 platforms. On FX365 you can select the “Maximum Slippage field”.
With the Maximum Slippage field feature you can pre determine the slippage or worst executed price that you are willing to accept. If the market gaps (moves without trading) past the maximum slippage level the order will become a limit order which will remain working at the maximum slippage price.
Example: You place a stop order to sell EUR/USD at 1.4550 with a maximum slippage of 10pips. This means the worst executed price you are willing to accept is 1.4540 (1.4550 – 10pips).
During normal market condition, this order will be executed at 1.4550 *. However, when market is volatile and gapping occurs the order will be filled at the next best price if it is within your range of 1.4550 to 1.4540.
But if market gaps past 1.4540 to 1.4520/22, this order will not be triggered instead it will continue to work in the system like a limit order till market rebounds back above 1.4540.
*Assuming stop on bid is used.
OCO: Once Cancels Other
A one-cancel-the-other order consists of both the limit and stop order. When either of the order is triggered, the other will be cancelled. It allows traders to both take profit, cut losses and offers protection for open positions.
Example: You are currently long 100,000 USD/SGD at 1.4100. You wish to take profit at 1.4300 and to cut loss at 1.4000. Simply place an OCO limit order to sell at 1.4300 and an OCO stop order to sell at 1.4000.
Hence, should the market reaches 1.4300 first, the limit order will be triggered to take profit at 1.4300 and the stop order will be cancelled.
An If Done (IFD) order is also known as a contingent order. This order is useful when you are unable to track market movements frequently. There are two parts to this order, usually the first part is used to initiate a position and the second part is an OCO order which will only become active if the first part of the order is done.
Example: You place an If Done order to buy 100,000 USD/SGD limited at 1.4100, with an If Done OCO order to sell limited at 1.4300 and sell stop at 1.4000.
The order will initially work to buy 100,000 USD/SGD at 1.4100. Once the first part of the order to buy USD/SGD at 1.4100 is triggered, the second part of the order – OCO order becomes active and starts to work in the system to protect your position.
A trailing stop is a useful tool for managing open positions, particularly in relation to trades with open unrealised profit. The trailing stop can assist in cutting losing positions quickly and letting profitable trades run by allowing the market to reverse before positions are taken out rather than placing a profit target level to exit.
A trailing stop-loss order is a stop-loss order set at a certain number of pips above (below) the market price for a buy stop (sell stop). The trailing stop is adjusted as the market price moves, but only in your favour.
Example: You are long AUD/USD at 0.8700. The market is currently trading at 0.8750/54 and you set the trailing stop at 20pips, the sell stop will initially become active at 0.8730 (0.8750 - 20pips).
If the market falls, you will be stopped up at 0.8730.
But should AUD/USD move higher to 0.8760 (0.8760 – 0.8750 = 10pips), the stop will adjust higher, pip for pip to 0.8740 (0.8730 + 10pips). The trailing stop will continue to adjust higher as long as the market continues to move in your favour. However, should the market stage a reversal your stop will be triggered at the last adjusted price or 20 pips below market.