Stop And Limit Orders, What They Are And How You Can Use Them To Improve Your Trading Performance

Stops and Limits refer to some special types of pending orders in the Foreign Exchange.

A stop entry order is an order to buy or to sell a particular currency as the case may demand, at some predefined price level which is above the current market price of that currency, having the conviction that prices will continue trending higher in the case of a long trade or shorting with the believe that prices will go south and banking the difference as profits for short trade scenarios.

A Limit entry order on the other hand is an order to buy or to sell a currency at a pre-specified price level above the current market price for that currency, believing that the price will stop and reverse course at some point.

Don’t fret if this seems to be a little bit confusing, I will explain each type of stop and limit entry order in detail in the following paragraphs.

A lot of Newbie and struggling Intermediate forex traders have a hard time understanding how to use stop and limit orders properly to specify their trade entries in the foreign exchange market, understanding how these orders work will save you having to wait long hours before your computer screen trade setups.

Say the spot exchange rate for the EURUSD currency pair is 1.3390/1.3393, what this really means is that if you wanted to buy the EUR you will have to give out 1.3393 US Dollars in exchange on the other hand, if you already own the euro from a long EURUSD trade you must have placed earlier your forex broker will be willing to buy back the Euros from you at 1.3390 US Dollars, with 1.3393 as the Bid Price and 1.3390 as the Ask Price.

There are four types of Stop and Limit Entry orders which I’ll explain in more details below, and they are;

1. Buy Stop Order
2. Sell Stop Order
3. Buy Limit Order
4. Sell Limit Order

#1 Buy Stop Order

A buy stop order is an order to buy a particular currency at some specified price level which is above the current market price of that currency pair backed by the reasoning that price will continue moving higher.

If the current market price for the euro was 1.3390 and you know from your trading analysis that if the euro were break the 1.3400 psychological resistance level and make it to 1.3405 it will continue its trek up, you could place a buy stop order at 1.3413 to join the bullish move up on the euro.

In short, you only use a buy stop order when you believe that prices are going to rise higher than where they’re currently trading at, you simply set an entry price preferably along with your profit target and stop loss so as to get into the market when price confirms your analysis.

This saves you the stress of having to wait long hours before your computer to open a trading position.

#2 Sell Stop Order

A sell stop order is an order to sell a particular currency at some price that is lower than the current market price backed by the reasoning that if price goes lower than say 1.3345 on the euro chart, it will continue to move down.

To explain this further, let’s assume that the current market price for the euro is 1.3368 and all your analysis points to an impending move southwards on the euro.

If price breaks below the 1.3350 psychological support level is you’ll want to have a sell stop anywhere in and around the 1.3340 -1.3347 price level to join in on the selling but be careful to trade only at forex trading times when the major financial centers overlap because you’re more likely to get a good follow through because more traders will see what you’re see and short the euro too.

#3 Buy Limit Order

A buy limit order is an order to buy a currency at some price lower than the current market price holding the opinion that price will stop and reverse on reaching some level of support.

Say for instance, the euro is currently trading at the 1.3350 price level and your forex trading strategy points out that prices are likely to retrace down to the 1.3320 psych level, you want to join the bullish move up when price resumes its climb and so you’ll place a buy limit order in an around the 1.3320 – 1.3327 price zone to jump right into the market.

#4 Sell Limit Order

A sell limit order refers to an order to sell a currency at some price which is higher than the current market price holding the bias that price will stop and reverse when it bumps to some predefined resistance level.

A sell limit order helps you specify the future price at which you’re willing to short the currency pair you’re analyzing.

Say for instance, the euro is currently trading at the 1.3350 price level and your analysis forecasts a possible retracement of the bearish move up to the 1.3380 psychological resistance level before continuing the down move, you might want to use a sell limit order to specify your entry price in and around the 1.3371 – 1.3377 price level to join in and profit from the selling.

The Foreign Exchange market is a comparison market; currencies are traded in pairs such as the Euro vs. US Dollar (EUR/USD), British Pound vs. US Dollar (GBP/USD), US Dollar vs. Swiss Franc (USD/CHF) and the US Dollar against Japanese Yen just to list a few.

When the economic condition of a country is favourable this will reflect in the strength of its currency, so also when there’s political and economic instability in a country this is often seen as weakness in the currency.

An Uptrend on the EUR/USD tells us that the euro is gaining strength against the dollar while a downtrend implies that the dollar is gaining strength against the euro, am taking the time to explain this to you because if you understand this, just a glance at the charts will be enough to let you in on what is really happening with any currency pair you wish to analyze.

An uptrend on the euro doesn’t necessarily mean that the US economy is bad; it only means that the euro is stronger and vice versa you’ll find this an invaluable forex trading tip.

You’ll find that Stops and Limit orders are available in the free meta trader 4 forex trading platform offered by most forex brokers on the internet today, click to enter a new order and select pending order from the drop down menu and do your thing!

Hope you enjoyed reading this article, remember to incorporate the use of stop and limit orders and free yourself from the shackles of waiting for trade setups, if you have any questions you want to ask drop it and be sure I’ll get back to you. Expecting your comments!

Cheers…

Article Source: http://www.streetarticles.com/day-trading/stop-and-limit-orders-what-they-are-and-how-you-can-use-them-to-improve-your-trading-performance