FX order types
You know the rate that would protect your margins. The question is whether you’re in a position to act on it when it’s available.
For most businesses, the answer depends on timing, capacity, and whether someone happens to be watching the market at the right moment.
A market order executes immediately at the current market rate. The benefit is certainty of execution, not rate optimisation. This suits situations where timing matters more than the rate itself, such as an urgent supplier payment, a payroll run, or replacing a maturing hedge position without a gap in cover.
The alternative is to set the rate you want in advance and let it execute automatically when the market reaches it. This gives you certainty on the rate, but not on when, or whether, it executes.
Four ways to define that rate
A limit order targets a more favourable exchange rate than the current market. It executes automatically if and when that rate is reached.
A stop-loss order defines a worst-case rate. If the market reaches that level, the order executes. It doesn’t improve your position, but it puts a floor on how bad it can get.
A one-cancels-other (OCO) combines both. You set a target rate and a floor. Whichever is triggered first executes, and the other is automatically cancelled.
A trailing stop-loss moves as the rate improves, maintaining a set distance from the current market rate. If the rate moves in your favour, the stop follows. If it reverses, the order executes at the adjusted level.
What to be aware of
These orders only execute if your specified rate is reached. In fast-moving markets, the rate can move through your specified level without a transaction executing at that exact price. This is known as slippage or gapping, and means your actual execution rate may differ from the rate you set. Orders remain active until they execute or you cancel them, so they need to sit within a managed FX position, not alongside one.
Knowing your target rate is the starting point. Most businesses can name the number that protects their margin without much difficulty. Fewer have a mechanism in place that acts on it the moment it’s available, rather than relying on someone to notice and respond in time.
Disclaimer:
This publication is provided for general information purposes only and does not constitute financial, legal, tax or other professional advice from Lumon, nor is it intended as a substitute for obtaining advice from appropriately qualified professional advisers. Foreign exchange services provided by Lumon are offered on an execution-only basis. Lumon makes no representations, warranties or guarantees, whether express or implied, as to the accuracy, completeness or timeliness of the content of this publication. Lumon Pay Ltd, trading as Lumon, is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022). Lumon Risk Management Ltd, trading as Lumon, is authorised by the Financial Conduct Authority as an Authorised Payment Institution (FRN: 567835) for the provision of payment services and is also authorised and regulated by the Financial Conduct Authority as an investment firm (FRN: 671108).
