Often new traders confuse about Stop and Limit orders. So, what is the difference between buy limit and buy stop orders in Forex trading?s
In Forex, various types of orders allow you to more precisely inform your Forex broker how you would like to fill your trades. Stop and limit orders are very useful when you don’t have enough time to watch the market. Still, what is the Buy limit and Buy stop difference in Forex?
Before we go through that let’s list down the possible order types in Forex trading:
- Instant Buy – an instant long position
- Instant Sell – an instant short position
- Buy Limit – pending order to go long
- Buy Stop – pending order to go long
- Sell Limit – pending order to go short
- Sell Stop – pending order to go short
Buy limit and Buy stop difference in Forex
Many Forex traders tend to confuse these two types of orders. In reality, everything is very simple. When you are intending to enter the trade, you have two different options:
- You enter the marketplace, meaning that you will buy or sell at the current market price
- You use pending orders. This implies that you are placing the order to be executed at a particular price.
For instance, if you place a stop or limit order, you are notifying the broker that you are not willing you order to be executed at the current market price, but when the price will move in a particular direction.
What is Stop order?
Therefore, with a stop order, your trade only triggers, when the currency pair or the security you want to trade will reach a particular level. In this case, we call it a stop price. As soon as the security hits the desired level, a stop order is becoming a market order. This also means that your broker has filled the order.
The usage of stop order is a very useful and popular practice among Forex traders. In addition, the stop orders are specifically helpful to investors that are unable to constantly monitor the market. Moreover, some of the brokerages are offering the setup of a stop order for free.
What is a Limit order?
A limit order will set the maximum or minimum at which the trader is willing the buy or sell the particular stock or currency pair.
One of the key advantages of using the limit order is that it ensures that the trade will be executed at a certain price or above this price. Bear in mind that the brokerages usually charge extra for the placement of the limit orders. In addition, it is possible that your order will not be executed in case the price will not reach the set level.
So, now after we went through the key definitions of the stop order and limit order, let’s summarize the key steps of the strategy:
How to place a pending buy order?
- Buy limit: In case you want to buy at price below the market price, use this tool
- Buy stop: If you want to buy at a price above the current price, place a buy stop order
How to place a pending sell order?
- Sell limit: If you need to sell the currency pair when the price is above the market price, you will need this tool
- Sell stop: This tool will help you to sell at a price that is below the market price
Limit and stop order difference example
Let’s assume that the EURUSD price is at 1.0950 level right now. Based on your strategy, you presume to have a psychological resistance at 1.1000 level and the pair to have a resistance bounce backward. Thus, you would place a pending EURUSD SELL LIMIT at 1.1000 level.
Alternatively, your strategy says that, if the price breaks below 1.0925, bears will get stronger and we will see the pair reaching 1.0850 level. Then you would use EURUSD SELL STOP at 1.0925 level.
What are the benefits of pending orders in Forex?
Which one is better, Limit order or Stop order?
Now, let’s try to find out which order type is more beneficial?! What is the Buy limit and Buy stop difference in Forex
In case of news or any other possible GAP trading, using STOP order might not be beneficial as you would sustain bigger possible loss than you would aim to have. On the other hand, LIMIT orders may give you a better opportunity to take advantage of the price differentiation. Thus, for buying the lows and selling the highs, I’d prefer to use LIMIT orders. Limit orders may also help you avoid stop-outs during high volatility based gaps.
Meanwhile, in times of usual volatility, and price action confirmation trading, stop orders may be more beneficial than the limit orders.
Which Forex Order type do you prefer?