Most traders use one order type for everything because that is what they learned first. But the choice between a limit, a market and a stop entry is a trade-off between certainty of fill and quality of price, and different setups need different sides of that trade-off.

What each order actually buys

The pullback trader should almost never use market orders

If your edge is buying weakness inside an uptrend, the whole thesis is that price will come to you. Chasing with a market order converts a favourable entry into an unfavourable one and quietly destroys the reward-to-risk ratio the backtest was built on. Missing a third of your entries is the cost of the method, not a flaw in it.

The breakout trader pays for confirmation

A stop entry above resistance guarantees you are never long into a market that fails to break. That certainty is expensive: you buy after the move has started, often into the first burst of volatility. Accept the price, but insist on a corresponding widening of the target. A breakout method with a two-to-one ratio measured from the pre-breakout level is frequently a one-to-one method measured from a realistic stop-entry fill.

Exits are different

For exits the priority inverts. Getting out is about certainty, not price. Use market orders for discretionary exits and resting stops for defined invalidation, and stop trying to shave a pip on the way out of a losing position. The trader who converts a stop loss into a mental stop to avoid slippage has traded a small known cost for an unlimited unknown one.

• AResting stop loss in the market from the moment the position is open.
• BPartial profit taken with limits at pre-defined levels.
• CDiscretionary exit by market order when the thesis breaks before the stop.

Choose the order type from the logic of the trade, not from habit. The habit costs about a pip a trade, every trade, forever.

Written by Adrian Vestberg — former interbank FX dealer, now running a two-person discretionary desk.

The post Limit, Market or Stop Entry: Choosing by Trade Type appeared first on Pro Forex Traders.

Traders budget for losses and forget to budget for costs. Yet over a year of active trading, spread, commission and slippage frequently exceed the net result. If you do not measure them, you are running a business without knowing your cost of goods.

The three components

• Spread. The visible gap between bid and offer. Varies by session, by pair and by volatility, and widens exactly when you most want to trade.
• Commission. Fixed and easy to model. Often the honest part of the pricing.
• Slippage. The difference between the price you expected and the price you received. Usually negative on stops and on market orders during news.

Put a number on it

Take thirty recent trades. For each, record the intended entry price, the actual fill, the intended exit and the actual exit, plus commission. Sum the differences in account currency. Divide by thirty. That number is what every future trade costs you before the market does anything at all.

The point is not that scalping is impossible. It is that a scalper needs an edge several times larger than a swing trader to clear the same net return, and most people never do that arithmetic before choosing a style.

Reduce what you can control

• 1Trade the sessions where your pair is liquid. EUR/USD at 03:00 London time is a different instrument from EUR/USD at 14:00.
• 2Prefer limit entries where the setup allows. Paying the spread to get in is a choice, not a law.
• 3Avoid holding through scheduled releases unless the trade is explicitly an event trade.
• 4Compare your fills against a second data source monthly. Systematic negative slippage on both entries and exits is a broker problem, not a market problem.

Build the cost into the plan

When you judge whether a setup is worth taking, subtract the cost first. A trade with a one point two reward-to-risk ratio before costs is frequently a losing trade after them. The cheapest edge improvement available to most traders is simply declining the marginal setups.

You cannot control the market. You can control which sessions you trade, which orders you use and which broker holds your money.

Written by Adrian Vestberg — former interbank FX dealer, now running a two-person discretionary desk.

The post Treat Spread and Slippage as a Cost, Not an Accident appeared first on Pro Forex Traders.