Forex Glossary

limit order

A limit order is a market order to buy or sell at a predetermined price. In other words, you can set a sell or buy order anywhere, and when a certain price reaches it, it will be triggered, opening a trade without the trader’s participation.

For a buy limit order, the execution occurs at the limit price or lower; for a sell limit order, at the limit price or higher. This mechanism ensures that trades are executed only when market conditions meet your specified criteria, providing greater control over entry and exit points.

A limit order is not guaranteed to be filled, however. It controls execution price but can result in missed opportunities in fast-moving market conditions known as slippage. Also, it can be used in conjunction with stop orders to prevent large downside losses.

It is usually valid for either a specific number of days (i.e., 30 days), until it is filled, or until the trader cancels the order.

How Does a Limit Order Work?

The idea behind it is to open a trade in the future based on the necessary criteria. Once placed, the limit order is inactive. But when the market price reaches the limit order level, it is triggered, and the trade becomes active.

Put differently, you can place a limit order at the level of 50 if you anticipate that the price will reach that level before reversing and falling. If successful, a sell position will be opened. Opening purchases works similarly.

For example, if EUR/USD is trading at 1.1000 and you place a buy limit order at 1.0950, the order will execute only if the price drops to 1.0950 or lower. This approach allows you to capitalise on favourable price movements without the need for constant market monitoring.

Types of Limit Order

  1. Buy Limit Orders: An order to purchase a currency pair at or below a specified price. This is used when you anticipate the currency’s price will decrease to a certain level before rising.
  2. Sell Limit Orders: An order to sell a currency pair at or above a specified price. This is employed when you expect the currency’s price to increase to a certain level before falling.

Advantages of Using Limit Orders

Price Control: Limit orders ensure that you do not buy above or sell below your desired price, providing precise control over trade execution.

Automated Trading: Once set, limit orders execute automatically when the market reaches the specified price, eliminating the need for continuous market observation.

Risk Management: By setting predefined entry and exit points, limit orders help in managing potential losses and securing profits.

Potential Risks and Considerations

Non-Execution: If the market does not reach your specified price, the order remains unfilled, potentially causing missed trading opportunities.

Partial Fills: In volatile markets, a limit order may be partially filled if there isn’t sufficient liquidity at the specified price.

Market Gaps: Sudden price movements can cause the market to skip over your limit price, resulting in non-execution.

Limit Order vs. Market Orders

While limit orders execute at a specified price or better, market orders execute immediately at the current market price. Limit orders provide price control but do not guarantee execution, whereas market orders guarantee execution but not the price. Choosing between the two depends on your trading strategy and market conditions.

Frequently Asked Questions

  • Can I modify limit orders after placing it?
    Yes, you can usually modify or cancel limit orders unless it has already been executed.
  • Do limit orders cost more in terms of fees?
    Some brokers may charge higher fees for limit orders due to their complexity; it’s advisable to check with your broker.
  • How long does it remain active?
    Limit orders can remain active for a day, a specified period, or until canceled, depending on your broker’s policies.

Incorporating limit orders into your forex trading strategy can enhance control over trade executions and improve risk management. Understanding how to effectively use limit orders is essential for successful trading.

Related Term

Order

Types Of Market Orders In Forex

Market Orders vs. Limit Orders: Unique Differences

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