Every Forex trader has to have sufficient knowledge about different order types to execute trades successfully. In this article, we take a look at open orders and understand a bit more about their risks and rewards.
What is an Open Order?
As the name suggests, open orders are those orders that are awaiting their execution in the market. Their requirements may be unmet, and they may get canceled by the trader or may simply expire. The trader has the ability to place orders that remain effectual until their conditions are satisfied.
Open orders can get delayed in terms of their implementation due to the circumstances linked to them and also because they aren’t market orders. Another reason why an order may stay open is the lack of liquidity in the market.
Open Orders Basics
These orders can come about from numerous types of orders. Since they don’t have any restrictions, most market orders, on the other hand, are filled instantly. But, there are some rare cases when these orders stay open until the day’s end, after which the broker cancels them.
Most open orders are limit orders or stop orders. These allow traders the ability to have some freedom from normal constraints when it comes to entering trades. Traders wait until they get a price to set before they execute the orders. They have the luxury of choosing the period of time in which the order can remain open so that it meets the necessary conditions. If the order doesn’t get fulfilled during this time-frame, it becomes null and void and expires.
These orders also have a ‘good till canceled’ (GTC) option, which traders can utilize. They can also cancel the order when they’re in the process of placing it. Most of the brokers have guidelines that state that orders will expire on their own if they are not filled even after months. Many times open orders are utilized to measure the depth of the market.
Risks Inherent in Open Orders
When these orders remain open for long periods of time, they become significantly risky. As soon as the order is placed, the trader is fishing for the price at the time of the order placement. The main risk inherent here is that the price could have moved on the contrary direction due to an event.
Traders who are not watchful of the market can be taken by surprise when the movements in price happen, especially if their order has remained open for many days. The danger is even more pronounced for traders that use leverage. That is the chief reason why all day trades are closed with the closing of the day.
Traders also have to be alert to their open trades that are about to close. A trader may have placed a take-profit order on a particular day, but if the market starts to rally, the trader should update the trade accordingly to avoid closing the trade prematurely. Similarly, the trader has to adjust the stop-loss orders according to changing market conditions.
To avoid falling prey to these risks, the trader has to keep reviewing the open orders continually. The trader can also overcome the risks by using day orders and closing all trades by the end of each day, instead of placing GTC orders. As such, traders can remain conscious of their open trade positions and make the necessary adjustments according to market conditions or initiate new orders at the start of the new trading day.
Until the conditions for working orders are fulfilled, they remain open and are subject to risks. They can be invalidated before their conditions are fulfilled or may expire at the end of the day. Most day-traders close their orders at the close of the day to ensure that the risks inherent in open orders do not mar their profits.