Stop Orders vs Limit Orders
When you are working with a broker, there are different types of orders that you can use to give them specific instructions about what you want to do in any scenario. Two of the most common are stop and limit order. But what are they and how are they different?
If you place a stop order, the trade will only be executed if the security that you want to buy or sell hits a certain price – this is known as a stop price. Once the currency reaches this particular figure, the trade will take place but if it doesn’t, then the trade won’t happen. So you could be trading in one currency pair that is at 109 and set the stop-loss order at 107 – when it reaches this point, the trade takes place. But if it doesn’t reach the figure, then the trade won’t happen.
So what’s a stop limit order? Or a stop loss order? Essentially, they are the same thing. They allow you to limit your losses and can even guarantee a profit.
Stop orders are popular with people who can’t monitor their trades for long periods of time and some brokerages don’t even charge for these. However, the downside is that there is no guarantee that the order will be fulfilled at the stated price and once it is triggered, it becomes a market order and is fulfilled at the best possible price – this can be lower than the price stated in the stop order.
A trailing stop order is a similar order that is used to restrict losses and to avoid margin closeouts. It works much the same as a stop order, automatically closing when the market is moving in a bad direction. But with the trailing stop order, the trigger price will follow the market if it moves in a favourable direction, allowing a gain in value of the currency and a reduction of the possible loss.
On the other hand, a limit order sets the maximum or the minimum that you will buy or sell a particular currency. As a limit order example, you might think that a certain currency pairing is about to move in a positive direction so you could place a limit buy order at a figure just above the current market rate. If the pair does move upwards in the way you thought it would, the limit order makes the trade as you stipulated, without the need for further action.
Limit orders guarantee that a trade will happen at a set price. Some firms do charge more for these orders and if the price doesn’t reach or fall to the stipulated figure in the order, then the transaction won’t take place.
Which Option is Best for You?
If you are unsure which is the best option for you, then you can talk it through with an expert who will be able to give you scenarios to help you make an informed choice. These orders can be used in different ways depending on your aims so getting the right advice as to which will be the most beneficial for you is always important.