There are many gainful opportunities for traders in the forex market, but no one is immune to losses. That’s the reason why traders should employ an efficient trading strategy where both stop and limit orders go hand in hand with other essential aspects of the strategy. This is how you significantly simplify the management operations of your orders. Those traders that employ large leverage can greatly benefit from even small moves in the currency market – the result totally pays off.
What is a Stop Order
This type of order can be used when a trader wants to exit an existing position or enter a new one. A stop order is an instruction to your broker to buy or sell an asset (currency pair) at the market price once it reaches the predetermined price (the stop price). Once an asset hits the stop price, a trader’s order becomes a market one and will be filled at the price that is available in the market. In case your currency pair doesn’t reach the specified price, the order won’t be executed. Talking about Buy Stop orders, they give instructions to buy a certain currency pair at a price that is higher than the current one. A Sell Stop order, in its turn, stands for selling a currency pair at the predetermined price that is lower than the current one.
It should be noted that these types of orders are placed if a trader expects a trend to continue its upward or downward movement. If, considering unexpected market turns, a trader wants to limit his/her losses, then it’s good to consider using a Stop Loss order.
For example, a trader wants to buy (go long) EUR/USD at 1.2334, placing a stop-loss order at, let’s say, 1.2314. This is how a trader limits the loss risk to 20 pips.
What is a Limit Order
It’s an instruction for buying or selling a certain currency pair when the market price reaches the predetermined one. A Buy Limit order is placed when there is a chance that the price will increase after reaching the specified level. Regarding a Sell Limit order, it’s placed if a trader expects the price to fall after an increase to the specified level.
A limit order gives you an opportunity to control the price you buy and sell currency pairs for. As compared to a stop order, this one is applied when a trader aims to get a better price than the current one.
Let’s say GBP/USD is trading at 1.3830. A trader has an intention to sell (go short) a currency pair if the price reaches 1.3855, so he/she just sets a sell limit order at 1.3855. If the price reaches 1.3855, an order will be automatically executed by a trading terminal at the best price available in the market.
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Important Note
- Stop Loss order aims to limit trader’s losses.
- Take Profit order aims to close trader’s order with profit.
Execute the Correct Orders
It all comes down to your precise understanding of different types of market orders that will come in handy if you want to make your trading profitable. Your forecasts aren’t always accurate due to the fast-changing nature of the forex market, so it’s better to play it safe.
You should also remember that there are no set rules on managing your positions – it’s your personal responsibility due to the different risk tolerance of every trader. For some traders, 10 pips difference is rewarding while others won’t even consider that as winning. It’s recommended not to make your price limitations too “tight” and unrealistic – this is where you’ll find a potential gap in understanding the maximal and minimal values of your currency pair.
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Final Words
There are many factors that may impact the execution of a trade. Before placing your order, get familiar with the ways you can control it – that’s how you raise the chances to successfully meet your trading expectations. Protect your assets, think rationally, and never stop learning.
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