when do you use a limit order and when do you use a stop order in trading forex?
I am a new student of Forex and realize both offer buy and sell options, both allow a predetermined price, I know the stop order is not guaranteed and the limit order is. I don’t know when the use of one is more appropriate than the use of the other.
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I assume you know the difference between a market order and a limit order.
A STOP order means you tell the computer what to do, and then you can get up and leave. The computer will send a buy or sell order as if you were there to enter the order yourself.
Of course, you must tell the computer when you want your order to be sent. The STOP PRICE tells the computer when to send your order. For example, it may send it only if XYZ hits 3.05.
BUY 40 XYZ @ MARKET
STOP PRICE = 3.05
The computer that does this automatic trading is not your computer but the central computer where trades are routed. So, you can enter a STOP order and turn off your computer and leave. The central computer will watch the price for you and send your order when it’s time.
Unfortunately, in a fast market, the prices may gap up several points and may jump over your STOP PRICE. The computer doesn’t know if you want to buy the stock on the way up or on the way down, so it will sit there and not do anything if the price jumps through your stop price. In this case, your order is not sent. So, a computer is not as smart as a human. It will only send your order if the stop price is EQUAL to the price of XYZ.
Let’s say that XYZ is trading now at 3.60. You want to buy XYZ if it breaks out above 5.40. Unfortunately, you can’t tell the computer to buy XYZ if it goes above 5.40. You have to provide ONE specific price that will trigger your buy order. So, you better come up with a price that is likely to be hit. You might pick 5.50. So, you would send this order:
BUY 40 XYZ @ MARKET
STOP PRICE = 5.50
You get up and leave. If XYZ starts to move up, it may hit 5.50. And in this case, the computer will send your buy order for you while you’re away.
Let’s look at another example. XYZ is trading around 14.70 and you want to sell your position in case the price drops below 13.12. Again, you can’t tell the computer to sell below 13.12. You must come up with an exact price where you want the computer to send a sell order. So, let’s say you do this:
SELL 70 XYZ @ 13.08
STOP PRICE = 13.10
This is an example of a stop limit order. Once XYZ hits 13.10, the computer sends your limit order.
LIMIT and MARKET orders are sent to the pit where they appear on the market makers’ screen. Market orders are executed immediately, but you may have to wait for a limit order to get filled.
The STOP orders do not get sent to the same place. The STOP order is sent to your broker’s central computer, and it stays there. When the STOP PRICE is reached, this central computer sends your order to the marketplace.
So, if you send a simple stop order to buy at a certain price, the market makers can’t see your order as long as it is sitting there. But if you send a limit order, the traders and market makers will see your order, and it may affect the price.
Limit Order: An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
http://www.investopedia.com/terms/l/limitorder.asp
Stop Order: An order to buy or sell a security when its price surpasses a particular point, thus ensuring a greater probability of achieving a predetermined entry or exit price, limiting the investor’s loss or locking in his or her profit. Once the price surpasses the predefined entry/exit point, the stop order becomes a market order.
http://www.investopedia.com/terms/s/stoporder.asp
As another answer has already pointed out but based on using stocks as an example (the principle is the same). When you enter any trade you would normally put a stop in place to limit the downside risk should it go against you. This will be for x number of pips. For a limit order you are deciding when you place the trade what you profit target will be, again x number of pips.
Depending on the broker you can choose to have a guaranteed stop or not, usually for an extra premium on the bid to offer spread. You might choose to use a guaranteed stop when placing a trade around the time of an announcement for example, which might sharply reverse faster than your broker is able to manually close your position otherwise.
This all depends on what you are aiming to get out of the market and whether you are scalping or using long term trades.
However you should always have a stop and limit order no matter what you are doing. Every good rading strategy should have one or you are eventually doomed for failure.
This all depends on what you are aiming to get out of the market and whether you are scalping or using long term trades.
However you should always have a stop and limit order no matter what you are doing. Every good rading strategy should have one or you are eventually doomed for failure.