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Limit Order and Stop Order

Tuesday, January 6, 2009

This is an order to buy or sell a given currency at a pre specified exchange rate or better, and can be used to enter or exit trades. It “limits” the price at which you are willing to trade at. When a Buy Limit order is placed, the trade cannot be executed at a price that is higher than the specified limit price. Therefore the buy limit is placed below the current market price. It can be used to obtain a better entry price when looking to go long, or used to close out or exit an existing short position at a profit.

When a Sell Limit order is placed, the trade cannot be executed at a price that is lower than the specified limit price. Therefore the sell limit is placed above the current market price. It can be used to obtain a better entry price when looking to go short, or used to close out or exit an existing long position at a profit. When using limit orders to exit existing trading positions, long or short, it is usually associated with pre-determined trading targets.

This is also an order to buy or sell a given currency at a pre specified exchange rate and can also be used to enter or exit trades. It is activated when the specified exchange rate, in this case the stop price, is reached. This is a very useful order, in that it is placed on the opposite side of the current market price than the limit order.

When a Buy Stop order is placed, the order cannot be placed at a specified prices that is lower than the current market price. Therefore the buy stop is placed above the current market price.
In this way it can be used to enter a new long position when the price of a given currency breaks above, “a price break-out”, a certain rate or it can be used to limit a loss in an existing short position. When a Sell Stop order is placed, the order cannot be placed at a specified price that is higher than the current market price. Therefore the sell stop is placed below the current market price.

In this way it can be used to enter a new short position when the price of a given currency breaks below, “a price break-down”, a certain rate or it can be used to limit a loss in an existing long position. As briefly mentioned above the stop order can also be used to stop a loss or protect profits, when the price of a currency moves against a trading position. This is why it is also referred to as a "Stop Loss" or “Protective Stop” order.

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