Forex Limit Orders - How And When To Use Them
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Limit orders provide a method for traders to enter and exit market positions whether they are trading the Forex, commodities futures or stock markets. Limit orders can be a useful tool to help the trader enhance his or her ability to profit from a trade. However, there is a potential downside to using limit orders. In this article, we will discuss when it can be advantageous to use them and when using them could backfire on you. As its name implies, a limit order sets the amount you will pay for a particular commodity if you are entering a buy position. It is a simple concept. It is just as if you are saying to a merchant I will give you $225 for that TV set and not a penny more. As applied to the Forex market you could be saying, "I will pay 1.3100 dollars for a EUR/USD Forex currency pair. When entering a sell position or closing a buy position you may also use a limit order. When doing so you would say, "I will sell a EUR/USD Forex currency pair for 1.3200, and not a penny less." However, the Forex is a very liquid market. This means if you decide to place a market order when a currency pair is trading at a particular amount, you will probably get your fill at this amount. Therefore, using a limit order to open a position can possibly cause you to miss a good buy or sell position because the market may never trade at or better than the limit price you have set to enter the position. However, a limit order can be a great tool for exiting a trade because it can get you out of a position as soon as your currency pair is trading at a predetermined profit level. For instance, if you have just entered a position and have predetermined you would be very happy to accept a profit of 14 pips, you may enter a limit order immediately to sell your long position at 14 pips above where it is now trading. Of course, it is always wise to also enter a stop loss order to sell your position at, in this instance, 5 or 6 pips below where it is now trading. It is also wise to enter this order as an OCO order. An OCO order is an order where one cancels the other. OCO means one cancels other. So, when the order is executed as a stop loss or a limit profit, the other order will be canceled. The point is; part of learning how to trade the Forex or any other market for that matter requires learning how to use a limit order to your advantage and how to avoid using one when it could cost you a profitable trade. FREE Trading System!