When you learn forex trading you might have come across the terms stop/loss and limit order. What are they and how they benefit for you to make money from trading?
Limit order and Stop/Loss are conditional orders. We call these conditional orders because they will not come into effect unless certain conditions are met. There are two types of conditional order that you can place while trading forex. They are the stop loss (which is also known as stop/loss) and the limit order.
The stop loss is a familiar order that controls the risk involved in a trade. With a stop loss, you are giving instructions to the broker, “If the price goes this far against me, I want out.” So if you have bought a currency pair expecting an increase in price, but then the price falls, your whole account balance will not get wiped out. The stop loss will be triggered when the loss reached at certain level according to your settings and protect the majority of your funds.
A Limit Order
A limit order is similar but applies to the opposite situation, the condition where you have a winning trade. With a limit order, you are instructing the broker, “If the price reaches this level, that’s enough, I’ll close there and take it.” Once set, the limit order will be activated if your pre arranged price (desired profit level) is reached and the trade will be closed at that price.
Many new forex traders are reluctant to use limit orders when they first start out. For them limit order seems counter intuitive. After all if the market is going your way, why would you want to close the trade? Wouldn’t you want to hold on as long as possible to get the most profit out of it? This is a serious mistake committed by many new traders.
The trouble with that approach is that sooner or later the price will reverse, and often it does it sooner rather than later. If you do not place a limit order, when will you close the trade? How will you know when it has gone as far as it is going? If you wait too long, a sudden reversal could see all of your profits wiped out.
So unless you have a system that is set up with very precise criteria to tell you when to close a trade, you will probably be better off if you use limit orders.
And where do you set them? Back testing your system can be helpful here. You can check through the last months and years of markets that would trigger a trade under your system and figure out what would have been the optimal setting for the limit order. However remember that past results are not necessarily going to be repeated in the future. Testing your limit order settings in a forex demo account is also useful.
In most cases you will want the limit order to be further from your starting point than your stop loss, even after spread is taken into account. This will mean that you only have to score a 50% success rate to be in profit. Setting the limit order at twice the pips of the stop loss, either before or after spread, might be appropriate. However, this depends on your system. Don’t skip the testing.
Using limit orders has another valuable benefit too. Once you have both stop loss and limit order in place, you can walk away from the computer and get on with your day. Though you won’t get the kind of freedom you can achieve through automated forex trading robots, with limit order and stop/loss in place there is no need to watch every little fluctuation of price until one or the other is triggered. This reduces stress and makes it less likely that you will panic and deviate from your original plan. So using limit orders in forex trades makes for a happier, more profitable trader.
For complete hands-free forex trading I suggest you to get a good automated forex robot like Forex Auto-Pilot Turbo (See FAP Turbo Review) or Forex Megadroid.