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SuperHero
SuperHero
Number of messages : 34
Points : 1643
Date of Entry : 2015-08-31
Year : 39

ma1 What is the difference between Limit and Stop Orders and when do I use them?

on Mon Aug 31, 2015 10:55 pm
Limit and Stop Orders are known as pending orders and unlike market orders are triggered only when the market reaches a price you have set. Limit Orders are used to enter the market at a price advantage.



For example, let's assume the current market price of the EURUSD is at 1.2600. You feel this price is too expensive to buy EUR at. You believe the pair will decrease before it rises again and you are comfortable at buying the currency at 1.2560. In this scenario, you place a Buy Limit Order at 1.2560. Once the market price reaches that price, your Buy Order will be filled. 


The same logic goes for Sell Limits but in reverse. With a Sell Limit you believe the price is too low to sell EUR against USD from. The price of a Sell Limit I set at higher than market price and the order is triggered once the market price reaches that level. A Stop Order on the other hand relies on a price that is higher than the current market price on the Buy side and lower than the price of the market on the Sell side. 


Stop Orders are mainly used to catch price break outs and are meant to get you into the market as the price of a currency is rising or falling. Assuming the price of the EURUSD is at 1.2600. You believe that the pair has a very strong resistance level at 1.2640 and that once the market reaches that level, the pair will break out and keep rising.



You place the Buy Stop Order at 1.2640 to catch that breakout. Again, the same logic applies to a Sell Stop Order, where the order price is set at less than the current market price to catch a movement to the downside.
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