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Stop & Limit Order

December 22, 2011 by Shaun Overton 3 Comments

Stop and limit orders are direct opposites. A limit order is jargon for “better price”, while a stop order means “worse price”. Many find it especially confusing that a stop entry order uses the same terminology as a stop loss. Technically, they are the same thing. A stop entry and stop loss are both prices worse than what you would get if you accepted the current market price.

Stop entry versus limit entry

Stop entries are used with momentum or breakout strategies. The theory is that if the price moves up, then it will be more likely to continue moving up. The trader loses out on the difference between the price at the time he decided to trade and the actual entry price. What he hopes to gain is the extra information that the price has moved, which might imply a higher probability trade.

A price that is worse the current market price for buying in the future is up. So, buy stops go above the current market price. Sell trades receive a worse price in the future if they wait and the price goes down.

Limit entries take the opposite approach. Market often tend to wander. They very rarely shoot off in a single direction without wiggling a little bit up and down. The idea behind a buy limit order is that you think that the price will increase in the future, but that you might be able to pick up the fx pair at a better price than what you’re seeing now. A buy limit goes below the current market price. A price improvement for a sell entry requires a price increase, so sell limit entries always go above the current market price.

Stop loss exit and limit exit

Most people find this part a lot simpler. Here, a stop loss means you lose money. The buy trade that you opened is going down. If it hits your stop loss, then the loss is realized. Stop losses go below the entry price for a buy trade and above the entry price for a sell trade.

Limits are the opposite. An open long trade is a bet that the price will increase. If it hits your limit exit, it means that you’re satisfied with the amount of profit on the table. Long trades place the limit above the entry price. Short trades place the limit exit below the entry price.

Filed Under: How does the forex market work?, Uncategorized Tagged With: limit, stop, stop loss

Trackbacks

  1. ECN Forex | One Step Removed says:
    December 28, 2011 at 22:33

    […] the stock market is also corrupt, at least setting a limit order actually shows through on the ticker. Most forex traders, amazingly, are not aware that this is how […]

    Reply
  2. NinjaTrader High Frequency | One Step Removed says:
    January 30, 2012 at 15:20

    […] MB Trading. Rather than placing market orders and paying a commission, I changed the order types to limit orders. We want to receive a small commission for the market making strategy rather than paying a […]

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  3. NinjaTrader Managed Unmanaged Orders | One Step Removed says:
    March 22, 2012 at 14:37

    […] strategy that we’ve written with unmanaged orders uses pending stop and limit orders. A recent example involves a market making strategy at Interactive Brokers. The strategy is 100% in […]

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