What are Limit Orders and Stop Orders?

Source: DailyFX 2020-05-22

LIMIT ORDERS

There are two types of limit orders involved in forex trading:

1. Limit orders to open a trade

The first is a limit entry order to get a better entry price. If the EUR/USD is trading at 1.1294 and you thought it would trade down to 1.1200 before rallying, you would place your limit order to buy at 1.1200.

If the EUR/USD is trading at the 1.12939 level and you thought it would rally up to 1.1300 before selling off, you would place your limit order to sell 1.1300. When using a limit order, you will only be filled at the price you designated or better.

2. Limit orders to close a trade

You can also use a limit order to close a trade when the market moves a specified amount in your favor. If you bought the EUR/USD at 1.1300 and wanted to exit when your trade showed a profit of 100 pips, you would place your sell limit order 100 pips above your entry or at the 1.1400 level.

If you sold the EUR/USD at 1.1300 and wanted to exit when your trade showed a profit of 100 pips, you would place your buy limit order 100 pips below your entry or at the 1.1200 level.

Graphical representation of a limit order on a forex chart:

STOP ORDERS

Stop orders are also frequently used in forex trading, and there are two variations:

1. Stop orders to open a trade

The first is a stop order to enter into the market. These orders can be used for trading breakouts. If you thought the EUR/USD would rally further after a move above the 1.1500 level, you would place a buy stop for entry at 1.1501. As the market printed 1.1501, your buy stop would become a market order and be filled at the next best price available.

If you thought that the EUR/USD would continue moving down if it traded down through the 1.1200 level, you would place your sell stop for entry at the 1.1199 level. As the market printed 1.1199, your sell stop would become a market order and be filled at the next best price available.

2. Stop orders to close a trade

You can also use a protective stop order to close a trade when the market moves a specified amount against your position. If you bought the EUR/USD at 1.1500 and wanted to limit your risk to 50 pips, you would place your protective sell stop 50 pips below your entry or at the 1.1450 level.

If you sold the EUR/USD at 1.1400 and wanted to limit your risk to 50 pips, you would place your protective buy stop 50 pips above your entry or at the 1.1450 level.

Graphical representation of a stop order on a forex chart:

Limit Orders

Stop Orders

forex

Entry Orders

Types of Forex Orders

What are Limit Orders and Stop Orders?

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