Forex Glossary

Stop Limit Order

Trading in the financial markets can feel overwhelming, especially for beginners. One key tool every trader should understand is the stop limit order. It’s a handy way to manage trades and minimize risks, giving you more control over your buying and selling decisions.

What Is a Stop Limit Order in forex?

A stop limit order is a trading instruction that lets you buy or sell a currency pair once it reaches a specific price, known as the stop price. Once the stop price is triggered, the order becomes a limit order. This means the trade will only execute at your chosen limit price or better.

For example, the current market price of a currency pair is 1.1000. Then a trader expects that if the price reaches the stop price of 1.1050, an upward trend will continue.

In this case, they can set the limit price at 1.1060 to avoid slippage and enter the market in the range of 1.1050–1.1060. If the price reaches this range, the order will be executed.

How To use Stop limit Orders

When a trader makes a stop-limit order, the order is sent to the public exchange and recorded on the order book. The order remains active until it is triggered, canceled, or expires.

Very often, when trading in Forex or the stock market, we understand that the price will continue to move as soon as it overcomes a certain level.

But when we confirm this, the price has already gone, and it is too late to enter the market. This problem is easily solved by setting a stop-limit order, this are some of the ways to set a stop limit order

Stop limit orders combine two price points to create a precise trading strategy:

  1. Stop Price: The price that activates the limit order.
  2. Limit Price: The lowest price (for a sell order) or the highest price (for a buy order) you’re willing to accept.

Here’s a step-by-step process:

  • You set both the stop and limit prices when placing the order.
  • If the market price hits the stop price, the limit order becomes active.
  • The trade is executed only if the market price meets or improves upon the limit price.

Types of Stop Limit Orders

There are basically 2 types, and the include:

Buy Stop Limit Order

With a buy stop limit order, traders can set the limit price at a level that is equal to or marginally higher than the stop price, with the preferred stop price set above the current market price.

This approach is useful when a trader expects an uptrend to continue but does not want to risk buying at an excessively high price.

For example, the current market price of a currency pair is 1.1100. The trader expects that if the price reaches the stop price of 1.1050, an upward trend will persist.

In this case, they can set the limit price at 1.1160 to avoid slippage and enter the market in the range of 1.1150–1.1160. If the price reaches this range, the order will be executed.

Sell Stop limit Order

A sell stop limit order allows traders to set the stop price below the current market price and the limit price at a level equal to or below the stop price.

This type of order is used when a trader awaits confirmation that a downtrend will be confirmed but wants to sell the asset at a level that is not lower than a predetermined one.

For example, the current market price of a currency pair is 1.3000. The trader expects that if the price falls to the stop price of 1.2980, a downtrend will be confirmed. In such a case, they can set the limit price at 1.2960 to minimize risks and guarantee execution in the range of 1.2980–1.19600. If the price falls to this range, the order will be executed.

Benefits of Using This Tool

Using a stop limit order offers several advantages, especially for traders who value control:

Risk Management

Stop-limit orders are an effective way to manage risk. By setting a stop price, traders can limit their losses if the market moves against them. By setting a limit price, you can ensure that you don’t get filled at a price that is too high or too low. This allows traders to control their risk and minimize their losses.

Price Precision

Ensures your trades occur at favourable prices.

Customizable Strategies

Because stop-limit orders can be used to enter or exit a trade and for both long and short positions, they are a flexible tool for traders regardless of the trading style that an investor wishes to pursue. They can be used in a number of trading strategies, such as swing trading, position trading, and day trading.

Emotion-Free Trading

Once you place a stop-limit order, it will automatically be executed when the stop price is reached. This means that you don’t have to monitor the market constantly and can let the order execute on its own. This can be especially useful for traders who cannot monitor the market or want a more passive style of trading.

Common Mistakes to Avoid

Setting the Limit Price Too Close to the Stop Price

This reduces the chance of execution if prices change quickly.

Ignoring Market Volatility

In highly volatile markets, prices can skip over your limit price, leaving the order unfulfilled.

Overcomplicating Strategies

For beginners, keep it simple to avoid confusion.

 

Related Terms

limit order

Entry Order

Market Order

Market Orders vs. Limit Orders: Unique Differences

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