How to Use Market, Limit and Stop Orders in Forex Trading

April 14, 2009 by  
Filed under Forex Trading

In order to understand all of the tools available and options included in the world of Forex trading you should first be familiar with the concept of market orders. Market orders are placed by you, the investor, to execute your buy or sell requests at the current market price when it is filled. This means that the price may not be exactly what you see on your screen at the time you place the order, and this is an important factor when Forex markets are fluctuating at an exponential rate.

High volatility of these Forex exchanges means that you could place a buy order at $1, let’s say, but when it is filled, your actual price is $1.50. Depending upon the size of your market order, this could prove to be a costly variation!

Due to the odds of selling and buying at significantly different prices than intended with market orders, many Forex trades are conducted using limit or stop orders.

Limit orders essentially guarantee you will not buy above or sell below your stated limit price. This way, you are likely to complete your Forex trade very near or exactly at the price intended. Just remember that no Forex broker will be able to guarantee it will be conducted at the exact price you choose to limit it at!

For example, let’s say you bought yen at $1.2314. You place a limit sell order at $1.2324, but the market rises to $1.2334. This will allow you to lock in a pre-determined profit; yes, you’ll lose out on the additional gains, but at least you don’t risk losing significantly.

You could also place a limit buy order: If yen is currently at $1.7805 and you feel this is too high, but you want to buy it when it hits $1.3214, you place the limit buy order for this dollar amount. Now, the Forex broker knows you don’t want to pay more than this price for yen.

So, what if the price never reaches your limit order? It simply expires unfulfilled, and you’ll have to wait for an opportune time to place another.

Stop orders, also known as ‘stop-loss’ orders, can significantly reduce your chances of losing a ton of money in the volatile Forex currency exchange market. The difference between a limit and stop order is that a limit order is entered to buy or sell at a stated price or better. Stop orders buy and sell when a stated price is reached.

For example, if you buy yen at $1.3245, and you expect it to rise but want a buffer, you can enter a stop order at $1.2256. If yen hits this threshold, your Forex broker will sell it to cut your losses short. If it doesn’t, you can enter a market order to sell once it hits a high enough price, or increase the level to sell at.

Ensure you understand how these orders work before using them; research and study the Forex market and its behavior to determine how a limit, stop or market order can help fulfill your Forex trading needs.