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The difference between
stops and limits
Dear Subscriber,
Two terms you come across a lot in forex trading are limit orders and stop orders...
What are they and what's the difference?
Well, they're both types of an 'order to open'.
So, it makes sense we point out what those are first...
Basically, what we're talking about here is setting up an agreement with the spread betting company that if the market hits a specific price they'll open a trade for you.
When the market price reaches your specified price the trade order is 'filled' - or as I often refer to it: 'triggered' - into a live trade.
But if the market doesn't actually reach the market level you specified... it doesn't become a live trade.
You can see here what the 'order to open' ticket looks like...
And if you look at the fifth box down, where it says 'type', clicking on it you'll see it offers you the two different types of 'order to open'...
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You've got a 'Stop Order' and
a 'Limit Order'
What's the difference?
Well, let's look at limit orders first...
I like to think about limit orders in the sense that you're looking to get a better price.
So, if you're buying but you think the market will drop a little before it goes up, you'd place a limit order lower than where the market is.
That way, your order to buy will trigger at a lower level and you'll get a better price.
Conversely, if you're looking to sell and you think the market is going to go up a little before it goes down, you'll place your limit order higher than where the price currently is.
So, that's when you'll use a limit order...
When you think the market will go one way in the short term to enable you to get a better price for the long term play in the other.
A stop order is pretty similar in theory, but there is one slight difference.
And it's best to think of it like this...
Where you're looking for a better price with a limit order, with a stop order you're looking for confirmation.
You see, say you're buying into a market because you believe it's going up, but you're not 100% sure.
You want to see some confirmation, you want to see the market start going up first - then you'll get in.
That's when you place a stop order.
So, if you're buying, you'll place a stop order higher than the current price.
If you're selling, you'll place a stop order lower than the current price.
In both cases what you're doing with a stop order is saying: I think the market's going this way, but I want to see a little more proof before I place my trade.
And that's it...
That's how limit and stop orders work.
They're pretty easy to understand, but a little tricky to explain. Hopefully though, I've done so here.
As I say though, the way I think it's best to remember the difference between the two is...
You use a limit order when you're looking for a better price before you get into the big move.
You use a stop order when you're looking for confirmation of a big move before getting in.
Think of it like that and you'll soon get the hang of them.
Best wishes,
Richard Hill
Editor
Forex Round-Up
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