Basics of trading operations
Trading is a hard thing to learn, it needs you to read tons of educational articles and apply a lot of practice because it’s all about real money. The better you learn, the bigger your chances for success. But in the very beginning, you should pay attention to the basic principles of trading operations. And we prepared instruction for a popular trading platform MetaTrader 5.
There are three basic terms that you should know before taking the first steps into trading, they are order, position, and deal.
- An order is an instruction to a broker to buy or sell a financial instrument. Basically, orders are divided into 2 types: market and pending. We can also highlight special levels: Stop Loss and Take Profit.
- The number of purchased or sold financial instrument contracts is called a position. They are of two types: long and short. The first is the purchase of financial collateral for sale as the price rises. The second, or short, on the contrary, is designed to earn money while the price of the instrument is lowering.
- Commercial exchange of financial collateral is called a deal. Buying is carried out at the asking price (Ask), and selling is carried out at the supply price (Bid). One of the options for opening a transaction may be the launch of a market or pending orders. Sometimes, order execution can trigger a chain of deals.
Orders, positions and deals interaction.
The platform makes it easy to track how a position was opened or how a deal was completed. Thanks to a unique identifier called a “ticket”, it’s very convenient and simple to track the opening of positions and deals on the platform. These identifiers refer deals to the corresponding positions. Each deal receives a ticket for the order for which it was concluded. Thanks to the position’s ticket, its history is easy to track even if it has been influenced by several transactions.
In cases where trading operations are sent to the exchange or the liquidity provider, an additional identifier is used from an external system that allows you to track the interrelation of deals away from the platform.
How trading operations work
- The broker receives an order from the trading platform with the parameters for concluding a transaction.
- The server checks the correctness of the parameters (correct prices, availability of funds in the account, etc.);
- If the order has passed verification, it is awaiting processing on the trading server. There may be several options for the development of events: performed, cancelled upon expiration, rejected, cancelled by the trader.
- As a result of executing an order or launching a pending order, a deal is obtained.
- In cases where there is no position for the symbol, the conclusion of the transaction leads to its opening. When there is a position for the symbol, a deal can increase or decrease the volume of a position, close a position or cancel it.
How are positions taken into account?
Position accounting systems are divided into two types: netting and hedging. A broker is responsible for choosing the system used, which is done depending on the account.
The system allows you to have only one common position for a symbol at a time:
- If a symbol has an open position, closing a deal in the same direction increases the volume of this position.
- he reverse direction of the transaction allows you to reduce its volume, close (the volume of the transaction corresponds to the volume of the position) or cancel the position (the volume of the opposite transaction is greater than the current position).
The reasons for the opposite deal are unimportant.
We will explain the operation of the system by the example of the execution of two transactions for the purchase of EURUSD at 0.5 lots each:
The result of the execution of both transactions was one common position of 1 lot.
Unlike a netting system, this one allows several positions of the same symbol at once, including opposite ones.
A new position will be opened every time you complete a new transaction, even if it already has an open position for the symbol. In this case, the current position will not change.
Let us turn to a similar example, with the execution of two transactions for the purchase of EURUSD at 0.5 lots each, which shows the features of the system:
The result of transactions is the opening of two separate positions.
Selected System influence
The behaviour of the platform functions will largely depend on the position accounting system:
- Stop Loss and Take Profit rules are changing.
- In Netting System closing of a position requires a reverse trade operation for the same symbol and the same volume. Hedging for this purpose allows you to simply use the Close Position command in the position’s context menu.
- It is not possible to change a position in a hedging system. The current position will be closed, and with the remaining volume, a new one will open.
- A new condition for calculating margin is available in the hedging system - Hedged Margin.
The trading platform has a whole range of functions:
- preparing and issuing requests to the broker to complete trading operations;
- control and management of open positions.
For these purposes, several types of trade orders are used. We already wrote the basic information about what orders are at the beginning of the text. Let's move on to the details.
A market order is an instruction that a broker receives to buy or sell a financial instrument. The transaction is deemed completed after the completion of this order. The type of symbol affects the type of execution, which in turn affects the price at which the deal is executed. Basically, Ask is the purchase price, and Bid is the sale price.
The broker is instructed by the trader to buy or sell securities in the future on predefined conditions. In this case, everything is much more confusing and such orders are divided into several types:
- Buy Limit - a financial instrument will be purchased at the Ask price; it cannot exceed the amount specified in the order. Such orders are placed in anticipation of a price decline with a subsequent increase.
- Buy Stop - purchase of the instrument at the Ask price equal to or greater than specified in the order. It is realized in cases when the current price is lower than the one indicated in the order. The price should reach a certain level and continue to grow.
- Sell Limit - a trade order for sale at a price of "Bid" equal to or greater than that specified in the order. The current price level is lower than the value specified in the order. Usually, this order is placed in the expectation that the price of securities will rise to a certain level and then fall.
- Sell Stop - sale of the instrument at the “Bid” price, which may be equal to or less than that specified in the order. It is realized if the current price is higher than indicated in the order. The price should reach a certain level and continue to fall.
- Buy Stop Limit - combines a stop order to place a Buy Limit order. If the future Ask price reaches the stop level specified in the order (Price field), the Buy Limit order will be placed at the level specified in the Stop Limit price field. The stop level is set above the current Ask price, and the Stop Limit price is set below the stop level.
- Sell Stop Limit - this order is a stop order to place a Sell Limit order. As soon as the future Bid price reaches the stop level indicated in the order (Price field), a Sell Limit order will be placed at the level indicated in the Stop Limit price field. The stop level is set below the current Bid price, and the Stop Limit price is set above the stop level.
- All pending orders are triggered for symbols with the modes for calculating Exchange Stocks, Exchange Futures and Futures Forts according to the rules of the corresponding exchange. As a rule, the Last Price is applied, that is, the order is triggered when the price specified in the order is reached. But order triggering is always tied to Ask and Bid prices.
- There is a mode in which the price indicated when placing limit orders is not checked - “Exchange execution”. It is characterized by the ability to place an order above the current Ask price (for Buy Limit orders) and below the current Bid price (for Sell Limit orders). An order is almost instantaneous, after which it turns into a market order. The difference is that a pending order will be executed at a price no worse than the specified one, which cannot be said about market orders.
- If it is impossible to carry out a market operation during the activation of a pending order, it will be canceled and moved to the history with the status “Rejected”.
This type of order allows you to take profits when the price of a financial instrument reaches a certain level. The position is completely closed if this order is executed. Take Profit is always associated with an open position or a pending order, and you can request it only with a market or pending order.
The order is designed to minimize losses. It is used when the price of an instrument moves in the wrong direction. Achievements by the price of a given level automatically close the entire position. As with Taking Profit, such an order is always associated with an open position or a pending order.
An order is not deleted if it is impossible to execute during the activation of Taking Profit or Stop Loss. The order will work again at the next tick corresponding to the conditions of order activation.
Stop-loss and take-profit (netting) inheritance:
- When a position volume is increased or the position is reversed, Take Profit and Stop Loss are placed according to its latest order (market or triggered pending order). In other words, stop levels in each subsequent order of the same position replace previous ones. But at zero values in the order, the Stop Loss and Take Profit positions are deleted.
- For partially closed positions, the above orders are not changed by new ones.
- Stop Loss and Take Profit cannot exist without an open position, therefore, if one is closed, they are deleted.
- In order not to accidentally delete stop orders, Stop Loss and Take Profit of an open position are automatically inserted into the window for placing an order.
- The current Stop Loss and Take Profit values for a symbol with an existing position do not change when a trade operation is performed with one click (from the panel on the chart or from the market overview).
- When trading on the OTC market, the Stop Loss and Take Profit levels to remain unchanged when the position is transferred to the next trading day (swap).
- When trading on the stock market, similar conditions reset Stop Loss and Take Profit levels.
Stop Loss and Take Profit (hedging) inheritance:
- Partial closing of a position does not cause changes in orders.
- Deletion of orders follows after closing a position.
- Stop Loss and Take Profit are not set in the mode of using trading operations with one click.
The rules apply to manual trading and placing orders from experts (MQL5 programs).
- There is a function that allows you to adjust the last stop loss for the price, it is called Trailing Stop.
- Triggering Take Profit or Stop Loss closes the entire position.
- Exchange rules are of great importance for instruments in the settlement mode of Exchange Stocks, Exchange Futures and Futures Forts because it is for them that Stop Loss and Take Profit orders work. As a rule, the Last price (the price of the last completed transaction) will be used, namely, touching the Last price indicated. Do not forget about the prices of Bid and Ask, because it is at them that the purchase or sale takes place.
As we said above, Stop Loss is designed to protect your assets from incorrect price movements. An order can be manually moved to a breakeven level if the position again becomes profitable. But you can also automate this process using Trailing Stop. It is especially important to use this tool with a strong unidirectional price movement.
The two main conditions for using Trailing Stop are an open position or a pending order. Unlike Stop Loss, it is executed in the trading platform. There is a tool in the context menu of a position or order in the "Trade" tab:
The next step is to set the desired distance between the Stop Loss order level and the current price.
Trailing Stop can be only one for each open position or order.
How Trailing Stop works:
- When new quotes arrive, the platform will check the profitability of an open position.
- If the profit is equal to or higher than the specified level, a command to place a Stop Loss order is issued automatically.
- The movement of prices towards profitability also moves the Stop Loss position.
- The decrease in profitability does not cause any changes and profit is fixed.
- The previously established Stop Loss level acts in a similar way.
- When a pending order is triggered, the trailing stop of an existing position for the same symbol is overwritten by the trailing stop specified in the order.
- Trailing Stop is not updated in the case when a deal made as a result of a pending order triggering is directed opposite to the current position by symbol and is less than or equal to it in volume.
All modifications of Stop Loss received automatically are added to the journal.
The "None" parameter is used to disable Trailing Stop. It is located in the control menu. To disable the tool for all open positions and pending orders, you need to run the "Delete All" command.
- As we already said, Trailing Stop runs not on the server, but on the side of the trading platform, so its shutdown affects the work of Trailing Stop. In this case, the only hope for the "Stop Loss" exhibited by Trailing Stop.
- The frequency of operation of the Trailing Stop for one position is limited to 10 seconds.
- When several positions with Trailing Stop exist for one symbol, it is processed in a special way. When a tick arrives at a symbol, only Trailing Stop opened for the last position is processed. A tick arriving at the same symbol within 10 seconds will be processed at the next position. And if the tick arrives after more than 10 seconds, the Trailing Stop will be processed again at the position opened later than all.
All orders sent to the trading server can go through the following stages:
- Started - an order not yet accepted by the broker, but already verified for correctness;
- Placed - an order accepted by the broker;
- Partially filled - no explanation here needed;
- Filled - the order is fully executed;
- Cancelled - the client has cancelled the order;
- Rejected - the dealer cancelled the order;
- Expired - the order has expired, it is cancelled.
The status of orders can be viewed on the “History tab” in the “State” field, and pending orders that haven't triggered yet can be observed on the “Trade” tab.
There are 4 execution modes:
The mode in which an order is executed at the price offered to a broker. The current price is automatically substituted into the order when sending a request for execution. An order is executed if the broker accepts prices. In the opposite situation, the so-called “Requote” occurs - the prices at which this order can be executed are returned by the broker.
A mode in which the execution of a market order is carried out at the price previously received from the broker. The order execution price is requested from the broker before it is sent. After receiving it, you can either confirm or reject the execution of the order at the set price.
The mode in which the broker decides on the execution price without additional coordination with the trader. The trader agrees with the execution price before sending a market order.
A mode in which operations on a trading platform are displayed in an external trading system (exchange). Trading operations are carried out at the prices of current market offers.
The brokerage company itself chooses the appropriate execution mode for each financial instrument.
There are additional conditions for the execution of orders. They can be found in the "Fill" field of the order setup window:
Fill or kill
An order is executed only in the specified volume. The absence of the indicated volume of a financial instrument in the market leads to the non-execution of the order. A solution is to compile the required volume from several offers.
Immediate or Cancel
The transaction is concluded at the maximum amount available on the market within the limits specified in the order. If there is not enough financial instrument in the market, the order will be executed for the available volume, and the rest of it will be cancelled. The trade server is responsible for resolving this type of orders.
It is used for the market (Buy and Sell), limit and stop-limit orders. The order continues to operate even if the execution is partial. You can use the Return policy for market orders only in the "Exchange execution" mode, for limit and stop-limit ones - in the "Market execution" and "Exchange execution" modes.
Here is a table to help you understand the implementation of execution policies depending on the execution mode:
|Type of Execution/Fill Policy||Fill or Kill||Immediate or Cancel||Return|
So, that’s it! A pretty convenient instruction about basic principles of trading operations on Meta Trader 5 platform for you. It’s important information as the first step to trading, we advise you to learn it well! And don’t stop by reading just this article, there is a lot of knowledge to acquire and we will be providing you with it.