Stop and Limit Orders
Not every order in Forex has to be made exactly where the market is at that point in time. I’m not talking about waiting it out to analyze the data more, I’m talking about setting up a specific point in the market where an order is placed automatically. See, when you place a forex order in the market normal, you’ll be making an order at what is called, market execution. It means that the order will open at whatever point on the graph that it’s currently at when the system registers it.
At the intermediate level, not a lot of Traders utilize Market execution trades anymore. Most trades at this point are now using through stop and limit orders.
Stop orders are made to take advantage of a forex movement that utilizes a trend. That is to say, that stop orders are placed that points where the researcher deems that the market will stay in a consistent trend. This seems like it’s not that much different from normal market execution but stop orders are specifically set at a point where you expect the markets to go rather than where it is at that moment. So a buy stop order would be placed higher than the current market level and the sell stop order would be placed lower than the current market level. If the market does reach the levels at which the orders are placed then that is when a trading position is opened and you will be in an active trade at that point. Here’s an illustration.
If the current market is that 1.0045 pips, you would place the buy order above it. So about 1.0067 pips. It would be triggered if the market goes upwards in a buy position and touches or passes the set line of 1.0067 pips and you’ll now have a buy trade open at that line. Vice verse also applies when doing a sell trade. The sell order would be set below where the market is so that when the market goes downwards in a sell position it triggers it.
So you might be thinking, “Why not just buy or sell at the market execution if you think that it will eventually reach a trend point anyway?” Well, if the market goes further in the opposite direction to your trade, then depending on how much you’ve put in and the loss’ relative percentage of your account, the broker may auto-cancel the trade altogether to prevent you from losing a majority of your account if it drops further. And then you’ll have less to trade with after that massive loss. The stop order is made at a point that if the market does manage to get there, then you are really sure that it will continue that trend. There’s no guarantee that it will hit that point. If it doesn’t, then you don’t have to worry about losing money because the trade would not be activated. So it’s all about starting at a safer place.
Limit orders function slightly differently. Instead of activating once the market breaks through the line set in the direction of the order, limit orders operate when the market break through the line from the opposite direction. So a buy limit order would be triggered if the market goes DOWNWARD in a SELL position (as in, going down on the graph) and touches or passes the set line (vice versa applies). Here’s an illustration of a sell limit order. If the current market is that 1.0045 pips, you would place the SELL limit order above it. Again, at a value of around 1.0067 pips. Once the market rises to the point being in a buy position, it will trigger the order and you’ll have a sell position open at 1.0067 pips. You would do this because you predict that there will be a retracement of the market at around this point. So, even if it continues rising a bit past that point, causing you to be in a temporary loss, if the position does turn around then you can take full advantage of it and maximize profit. It goes with the saying: “Sell High, Buy Low”. By selling at what you think would be the highest point in the market, or buy at what you think is going to be the lowest point, if your predictions are correct then you will have a safe comfortable position to take advantage of the retracement.
Of course, like with normal market executions, it is recommended that you plan out a stop-loss or even a take-profit in accordance to the type of order, regardless of if it’s limit or stop. For those who don’t know, probably because it’s not talked about as much as a stop loss, take-profit is a point you set in forex where it automatically closes the trade when you’re rising in profit so that you will safely have the gains collected before the market could potentially switch directions. And just like the stop loss, it can be moved during the trade as long as the point hasn’t been hit. I specifically mention the take-profit here because since the order isn’t made immediately, unless you’re sitting there watching the trade until it hits that point…which could take forever or not happen at all, then the order could be triggered while you’re doing something else entirely. Away from the computer or phone. At that point, you don’t want to leave only a stop loss but a take profit to guard against potential major retracements. For sell orders, the take profit is still placed below and the stop loss is placed about. And of course, vice versa applies.