Home FXTrade FXtrade's Market, Limit, Stop Loss and Take Profit Orders

Understanding FXTrade's Market, Limit, S/L and T/P Orders

The OANDA FXTrade Platform offers a fully automated environment where OANDA plays the role of market maker with no human intervention. The FXTrade Platform was designed to take into account the characteristics of the Internet and to exploit the advances in computing technology that have taken place over the last 5-10 years. As a result, and in order to simplify the trading process for the end-user, the OANDA FXTrade Platform executes orders slightly differently than is done traditionally and in other FX trading environments. It is important that the users of FXTrade understand the differences and the "rules" of the system in order to fully exploit the advantages of the FXTrade Platform.

The OANDA FXTrade Platform is a market making system that executes orders using the most up-to-date exchange rates prevalent in the market. It is specifically not an auctioning system or a matching engine in which a trade is executed only if both sides of the trade can be filled at the time of the buy/sell request. Moreover, the FXTrade Platform does not require a trader to request a bid/ask quote from a pricing source and then make a buy/sell decision based on the quote offered.

Market Orders

Market Orders are orders that are transacted immediately based on current market exchange rates. On the OANDA FXTrade Platform, a trader issues a market order based on current exchange rates as displayed on the user interface by clicking on the submit button in the "Buy/Sell Market Order" window.

Exchange Rate used for execution of a market order

When a market order is submitted by a trader, then it is transacted immediately at the OANDA FXTrade servers without further communication with the trader (assuming various boundary conditions such as sufficient margin requirements are met). The exchange rate used for the trade will correspond to the most current exchange rate maintained at the OANDA FXTrade servers and not necessarily the rate displayed in the Buy/Sell Market Order window at the time the order was submitted. This is because the rate may have changed between the time the order was submitted and the time the order is executed. Typically, the difference between the rate obtained for an order and the rate displayed in the Buy/Sell Market Order window when the order is submitted will be small (and often to the advantage of the trader). However, in times of market volatility, the difference can be larger --- in this case, the "lower bound" and "upper bound" fields of the order can be used to limit the traders risks, as described below.

The behavior of the OANDA FXTrade Platform is thus different than more traditional FX trading environments where the trader (i) requests a bid/ask quote from a pricing source given a currency pair and the amount to be traded, (ii) obtains a bid/ask quote from the pricing source, and then (iii) optionally issues a buy or a sell order for the currency pair and amount specified. In these environments, the buy/sell order is often declined when the market has moved since the bid/ask rate was issued, requiring the trader to go through the process again. With the OANDA FXTrade Platform, the order is always transacted on (assuming various boundary conditions such as sufficient margin requirements are met), and the same exchange rate is used, regardless of transaction size (whether $1 or $1,000,000).

Immediate settlement

Another difference between the OANDA FXTrade Platform and other, more traditional FX trading environments is that FXTrade offers immediate settlement of trades.
In the traditional FX market, the notion of settlement date for a trade refers to the date on which delivery of the trade's specified amount of the base currency is made against receiving the specified amount of the quote currency from a second counter party, based on the agreed upon exchange rate. Typically, the settlement date is within two business days of the deal date (or one business day after the deal date in the case of USD/CAD). Currency traders, however, rarely deliver. Instead, they use what is referred to as a rollover swaps. The rollover swap is designed to allow the changing of an old deal date to the current date by simultaneously closing an open position for today's date and opening the same position for the next day at a price reflecting the interest rate differential between the two currencies. Typically, rollover swaps occur at 4pm EST.
In contrast, OANDA's FXTrade Platform offers immediate settlement, and there is no notion of rollover swap. Instead, OANDA pays and charges interest on any currency pair position on a second-by-second basis, from the second a currency pair is bought/sold to the second it is sold/bought. See the document on interest rates calculation for more detail.

Limiting market order risks by specifying lower and upper bounds

Due to the fact that most current rates maintained at the OANDA servers is applied to submitted market orders (and not necessarily the rates visible on the user interface), our platform allows a trader to limit his or her risks by setting the optional lower and upper bounds fields in the Buy/Sell Market Order window. An order will then be executed only if the exchange rate to be applied is equal to or higher than the lower bound, if specified, and if the exchange rate to be applied is equal to or lower than the upper bound, if specified. If the most current exchange rate at the OANDA servers lies outside the interval specified by the lower and upper bounds, then the market order will be rejected.

Market orders affect existing open positions

When a market order is executed, it will close out any counter open trade should one exist, using a First-In-First-Out (FIFO) policy. The following three examples illustrate this.

Example 1:

Existing open trades: Trade 1: Long $10,000 USD/JPY
Market order: Sell $10,000 USD/JPY
Resulting open trades: none.

Example 2:

Existing open trades: Trade 1: Long $10,000 USD/JPY @ 120.00
Trade 2: Long $10,000 USD/JPY @ 121.00
Market order: Sell $15,000 USD/JPY
Resulting open trades: Long $5,000 USD/JPY @ 121.00
(corresponding to half of Trade 2)

Example 3:

Existing open trades: Trade 1: Long $10,000 USD/JPY
Market order: Sell $15,000 USD/JPY
Resulting open trades: Short $5,000 USD/JPY

Limit Orders

A limit order specifies that the order should be executed when the exchange rate of the specified currency pair crosses a specified threshold. A limit order is maintained in the system for the duration specified, up to 1 month.
The OANDA FXTrade servers continuously monitor the set of open limit orders and the current exchange rates to determine when an order should be executed. A limit order will be executed within seconds of when the exchange rate crosses the target threshold. However, it is important to note that the exchange rate used for executing the limit order is the most current exchange rate at the time the order is executed and not necessarily the threshold specified in the order. Thus, the rate applied for the execution of the order may be either higher or lower than the specified threshold by a small amount because of the continuously changing exchange rates. Again, upper and lower bounds can be set to limit the risks.

Limiting limit order risks by specifying lower and upper bounds

A trader can limit his or her risks by setting the optional lower and upper bounds fields in the Buy/Sell Limit Order window. An order will then be executed only (i) if the exchange rate to be applied is equal to or higher than the lower bound (if specified) and (ii) if the exchange rate to be applied is equal to or lower than the upper bound (if specified). Thus, for example, if the current rate is 1.660 when a limit order for 1.640 is submitted, and the trader want to ensure that a trade is executed with a rate equal to or lower than 1.640, then the trader can set the upper bound to 1.640.
If, at the time a limit order is executed, the most current exchange rate at the OANDA servers lies outside the interval specified by the lower and upper bounds, then the limit order will be rejected and the limit order is erased from the system.

Limit orders affect existing open positions

As with market orders, a limit order, when executed, will close out any counter open trade, should one exist, using a First-In-First-Out (FIFO) policy. Hence, if a trader is long $10,000 on USD/JPY and issues a sell limit order for $10,000 USD/JPY, then the execution of the market order will have the same effect as closing out the $10,000 long position along with any Stop-Loss or Take-Profit orders associated with the long position.

Stop-Loss and Take-Profit Orders

To limit the down-side risk of open positions, a trader can issue a Stop-Loss (S/L) order for each open trade. The Stop-Loss order specifies that the trade should be closed automatically when the currency exchange rate for the currency pair in question crosses the specified threshold. For long positions, the Stop-Loss threshold is always lower than the current exchange rate; for short positions, it is always higher.
To lock-in profits, a trader can also issue a Take-Profit (T/P) order. The Take-Profit order specifies that the trade should be closed automatically when the exchange rate crosses the specified threshold. For long positions, the Take-Profit threshold must be higher than the current rate, while for short positions, it must be lower than the current rate.
As with Limit Orders, it is important to note that a Stop-Loss or Take-Profit Order is triggered when an exchange rate crosses a threshold, but the exchange rate used for executing the order is the most current exchange rate at the time the order is executed and not necessarily the threshold specified in the order. Thus, the rate applied for the execution of the order may be either higher or lower than the specified threshold by a small amount because of the continuously changing exchange rates.

S/L and T/P are similar to limit orders, except that they always correspond to an existing open trade, and bounds cannot be set. If an open trade is closed, then all corresponding S/L and T/P orders associated with the open trade are erased. S/L and T/P orders can be specified when issuing a market or limit order by checking and filling in the S/L and T/P fields in the Buy/Sell Order window. S/L or T/P orders corresponding to an open trade can also be set or modified by double clicking an open order in the "Open Trades" table (which results in a new window popping up), and then setting the action to "modify" in the pop-up window, followed by filling/modifying the S/L and T/P fields.