Limit Order Definition

Introduction To Limit Orders

Instead of entering and exiting your trades “at market”, you have the option to use limit orders for better execution and profits. By definition, a limit order is an order with your broker to take a long position of your currency pair at or below a specified price, or to sell it at or above a specified price. For example, if the EUR/USD is trading at 1.3000, and you wish to buy at a price of 1.2990 or less, you would place a limit order with a limit price of 1.2990. Your order will be entered into the system as a standing order, and once the price falls to 1.2990 or below, your limit order will be entered into the market and executed at the best possible price within your set limits.

Limit orders are very useful because they free you from having to be at your computer and enter trades as and when you see them. If you have pre-planned setups, for example if you wanted to buy just below the support level or at the bounce back to the trend line, you can use limits to ensure that you will have the best chance of executing your entry at your desired price. If you rely on your own reflexes to place the market order at the specified price, you may suffer slippage and get a far worse price than you would with a limit order.

Using Limit Orders To Enter Trades

You can use limit orders to enter positions whether you’re going long or short, but you need to be aware of how the limit order will work in each of these scenarios. Whether you’re going long or short, a limit order means that you’re aiming to get a better price than what is available. That means that if you’re looking to take a long position, then your limit will be set below the market price, while if you’re taking a short position, your limit will be set above the market price. Of course, you can set your at the current price or worse, but that will just execute you at market. For example, if the EUR/USD is trading at 1.3000 and you place a limit order in at 1.3010, you’ll simply buy at the market price of 1.3000. Of course, if there are not enough contracts available for you to take your entire position at 1.3000, you’ll buy the next lot of contracts available to you all the way up to 1.3010.

When you’re using limit orders to enter your trades, you need to understand that there’s the risk that the prices will never dip below your limit price, meaning that you may not even get to enter your trades. So if you’re using limit orders as part of a proven Forex trading strategy, for example entering at support or just below support, getting in at Fibonacci retracement points or retracements to the trendline or MA lines, then carry on. However, if you’re just doing it to save yourself a couple of pips, know that you may be robbing yourself of a monster move just for the sake of saving a few pips.

Using Limit Orders To Take Profits

Limit orders are also very useful for exiting your trades at a specific target price. For example, if you normally take profits when the prices move 20 pips in your favor, then you can just use a limit order to exit your trades 20 pips from your entry. For example, if you entered the EUR/USD long at 1.2990 and you wanted to take 20 pips profit, you would simply set your sell limit at 1.3010.

Again, it’s advantageous for you to use limit orders instead of relying on your own reflexes to exit at market because you may encounter slippage, or the price may simply move against you before you are able to react, which will cause you valuable pips. As limit orders are automated, it will trigger immediately once your target price is hit. Of course, there’s the risk that the price will never hit your limit as well, but if your target profit taking is part of your overall trading strategy, this is a risk that you will encounter regardless.

All in all, limit orders are a very handy tool in any serious trader’s arsenal. Why not try out limit orders in your trading and see how you can improve