By Sean Hyman, Currency Analyst
www.worldcurrencywatch.com

One of the most commonly used orders in Forex trading is known as “limit order.”

 You can use limit orders in two different ways. You can use them to enter a position or add to your present order as the level to exit the trade at.

The easiest way to think of a limit order is that it lets you specify the pair’s price but not time. So technically, you get to enter or exit a position on your own terms, at the price (exchange rate level) that you specified.

The order will simply sit there until the exchange rate reaches your price. This type of order can be good for several reasons. First of all, I like limit orders because you can technically enter or exit a trade automatically when the exchange level reaches the right price – even if you’re away from your computer.

I also like to have a limit order in so that my dealer has instructions already placed just in case something happens and I can’t get back to my computer (or my computer dies etc – it can happen).

I also like limit orders because the Forex market can move faster than I can respond to it. For instance, sometimes there are quick spikes up or down that can trigger a limit order that’s already in place. But sometimes, you can’t catch a spike up or down quick enough by the time you see it and manually try to execute a market order.

This can come in very handy – especially in a volatile market like we’ve seen lately.

It’s a 24-Hour Market, So Trade in Your Sleep

Let me give you a quick example of how this works. This past Sunday night, I wanted to short the EUR/GBP (euro/pound pair) if the price reached a certain level.

Unfortunately it was late, and I had to go to sleep. So I put in a limit order as my entry price even though I thought it was unlikely that the exchange rate would hit my desired price. 

But low and behold, I woke up to find out that the exchange rate did hit my limit (entry in this case)! I was up US$1,000 on my three lots. What a way to wake up!

As it turns out, an ECB official had mentioned there could be more rate cuts coming (in his opinion) for the Eurozone. That crushed the EUR/GBP pair for a quick 300 pip drop. If I hadn’t had the limit order ready, then I would have missed a US$1,000 trade. I literally made money while I slept because of it.

The limit order to enter a trade on your trading station is commonly called an “entry order.” That was what I placed. However, you can add in a limit to your present order and that tells it how to exit out of the trade.

A few Sundays ago, a few friends and I were all trading on a Sunday night as the market opened up.

We were all instant messaging each other so I knew we all placed the very same trades. As a habit, I put in a limit order of where I would want to exit the trade in case the pair quickly reached my price. My friends didn’t bother with limit orders. They were just monitoring their trades.

The pair spiked high for literally only a second or two. However, it was a very high spike due to the low liquidity that is common when the market first cranks back up for the week.

Therefore, I got out of the trade faster than the rest of the other guys. While they fumbled to hit the close button fast enough, my trade automatically closed. As a result, I made about 50 pips more than they did because my limit order was already in place, and they missed the spike altogether. 

Experience taught me to put in the limit. It literally paid me to do so in that case.