How To Get A Better Entry: Set A Trap!

By January 27, 2014Articles

trap door spiderAll traders want the best entry into the market. When a trader is consistently feeling that their entries are not as good as they can be, it usually means they are not planning their trades completely. The question is: How can I get a better entry into the market? Easy. Set a trap using order types that work to your advantage.

The idea I wish to express in this price action trading article is this: Put yourself in control of your entries and your trading by using different limit order types. Unlike ‘Market’ orders, Limit orders allow you to set the price you wish to pay.

Market orders are probably the worst of all orders. Although they have their place in the trading universe, I advise using them at all. When traders use a market order, they are putting themselves and their capital at the mercy of Mr. Market. In a fast moving market, your order could be filled far away from what your ideal entry is. I’ve seen brokers who have ‘flexible’ spreads, blow the spread wide open by sometimes as much as 25 pips at a news event. Imagine if you had placed a market order just as that news event took place and you find your entry was now at least 25 pips (plus the quick change in price due to the market moving news) away from your intended entry. That would be a very big deal. You might even get filled past your stop loss! This is a nightmare scenario for traders that don’t understand how limit orders can control the fill price for their order.

Limit Orders

Let’s take a look at each of the four main types of limit orders available from most brokers. They may go by different names, but they act in the same manner to achieve the same results. In our examples I’ll be using limit orders as defined by MetaTrader 4. In MT4 limit orders are set under the ‘Pending Order’ type.

Buy Stop

A Buy stop order is set where the price you want to purchase your chosen currency pair, say EUR/USD, is above the current market value. Some brokers that provide MT4 demand that your entry price is X number of pips away from the current market price. I prefer to go with a broker that does not have that restriction.

Let’s say EUR/USD is currently at 1.3671 and you’re looking to go long at the break of an inside bar candle. You’re thinking that you would like an entry two pips above the close at 1.3685. You would set the Buy stop order to trigger at 1.3687 and when price rises to 1.3687, your order will be filled. If there happens to some quick but orderly movement, your order will still be filled. Only when price gaps are limit orders typically not filled.

Buy Limit

A Buy limit order is set where the price you want to purchase your chosen currency pair, say EUR/USD, is below the current market value. Some brokers that provide MT4 demand that your entry price is X number of pips away from the current market price. I prefer to go with a broker that does not have that restriction.

Let’s say EUR/USD is currently at 1.3671 and you’re looking to go long at a 50% pullback into a hammer/pin candle. You’re thinking that you would like an entry at 1.3648. You would set the Buy limit order to trigger at 1.3648 and when price falls to 1.3648, your order will be filled. If there happens to some quick but orderly movement, your order will still be filled. Only when price gaps are limit orders typically not filled.

Sell Stop

A Sell stop order is set where the price you want to purchase your chosen currency pair, say AUD/USD, is below the current market value. Some brokers that provide MT4 demand that your entry price is X number of pips away from the current market price. I prefer to go with a broker that does not have that restriction.

Let’s say AUD/USD is currently at 0.8738 and you’re looking to go short at the break of an inside bar candle. You’re thinking that you would like an entry two pips below the close at 0.8736. You would set the Sell stop order to trigger at 0.8736 and when price falls to 0.8736, your order will be filled. If there happens to some quick but orderly movement, your order will still be filled. Only when price gaps are limit orders typically not filled.

Sell Limit

A Sell limit order is set where the price you want to purchase your chosen currency pair, say AUD/USD, is below the current market value. Some brokers that provide MT4 demand that your entry price is X number of pips away from the current market price. I prefer to go with a broker that does not have that restriction.

Let’s say AUD/USD is currently at 0.8738 and you’re looking to go short at a 50% pullback into a shooting star/pin candle. You’re thinking that you would like an entry at 0.8750. You would set the Sell limit order to trigger at 0.8750 and when price rises to 0.8750, your order will be filled. If there happens to some quick but orderly movement, your order will still be filled. Only when price gaps are limit orders typically not filled.

Take a look at the image below for a more illustrative explanation of order types:

order types layout

In Conclusion

As you can see, each of these limit orders are not all that different from the other. They provide a way for a trader to have control over what price they would like to either purchase or sell their chosen currency pair. All professional traders use limit orders nearly all the time. Limit orders allow them to plan and control the execution of their trades.

Try demoing a few trades to get used to the different order types. I can assure you that once you get used to planning your trades and executing them using limit orders, you’ll wonder why you were not doing that from the beginning.

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