Which Order Should Trader Use: Limit Orders or Stop Orders?

EnclaveFX Ltd
Sep 20, 2023

Limit orders and stop orders are two crucial trading instruments that traders leverage to decide wisely whether to buy or sell Forex currencies. A market order is triggered by a stop-loss order when the price is reached. A trader may utilize a stop-limit order or a stop-loss order to reduce the risk of potential losses in ongoing circumstances or to seize gains when trading swings. The kind of order a trader enters will depend on their circumstances and the current market price, but based on those circumstances, they may enter either a stop-limit order or a stop-loss order.

How Limit and Stop Orders Work

A limit order is an order for an open or pending position. If the order is laid on an open position, it will close. There are two categories of limit orders: Buy limit order: In which an asset is bought at a set price or lower price. Sell limit order: In which the asset is sold at a price within a limit.

How to Use Limit and Stop Orders are as below:

  • - Choose a position from the Open Position window by right-clicking.
  • - Choose the limit column in the desired position row and click on it and set your preferences for the limit order.
  • - On the trade tab, choose the Limit.
  • - Click on the position in the Set Limit Order window.
  • - Then, set preferences for the limit order.

Stop-Loss Strategy

When a trader uses a stop-loss strategy, they frequently utilize stop-loss orders to initiate a position and exit it at a predetermined loss level. Additionally, stop-loss orders can be used by short sellers to initiate a buy order as opposed to a sale order. The market price, not the stop-loss price, is used to execute contracts once a stop-loss is activated. To control the price at which the deal will be executed, traders can convert their stop-loss orders into stop-limit orders with the platform provided by the best online forex broker.

Stop-Limit Orders

In a stop-limit order, two order types are combined: First, a stop-loss order is present, and if the target price is hit, it triggers the contract. The second type of order fills the contract if the security price reaches the target price. Despite the fact that the limit price order is made at the same time as the stop-loss order, both contracts are still placed at the same time. Depending on the limit price entered, this kind of order may be triggered but not fulfilled.

Advantages and Disadvantages

It is important to note that both types of orders have advantages and disadvantages. In general, both can provide hedge protection against unfavorable changes in security prices.

Using Stop-Loss Orders Has Many Advantages

  • - Provides protection from further downside for poorly performing securities
  • - Provides a guarantee of a trade
  • - Short-term volatility hedges
  • - Provides protection against losses when a security moves in the opposite direction from a traders' situation

Using Stop-limit Orders Has Many Advantages

  • - Affects price volatility in a positive way
  • - Ensures that a trade will be executed at a minimum price
  • - Allows investors to reconsider their position if the limit price isn't reached
  • - Ensures the investor's losses are limited if a security moves against the investor's preferences.

The disadvantages of stop-loss orders

  • - As the order triggers automatically if the stop loss price is met, there is little to no flexibility.
  • - The order is executed at the market price when triggered, which might be less than the stop order loss price.
  • - The stop levels of other investors may be taken out by other investors
  • - A thorough understanding of how different brokers determine and execute their prices is required

Putting a stop limit on a transaction

  • - As long as trigger and limit prices are different, there is no guarantee that the trade will be executed.
  • - Other investors may attempt to take out investors' stop levels by using this strategy
  • - The broker may charge an excessive commission if the service is not offered for free
  • - As different brokers have different criteria for triggering and executing positions, it is necessary to gain an understanding of how prices are determined

Is there a difference between a market order, a limit order, and a stop order?

A market order executes immediately at whatever the call price is at the moment of execution. A limit order triggers when a market price is reached. It doesn't really activate, though, until a limit price is caught. When the stop-loss price is reached, a stop order is placed, even if it enforces below this price.

A Brief Summary

Both long and short investors might benefit from distinct protections provided by stop-limit and stop-loss orders. A stop-limit order, which combines the traits of a stop and a limit order and is designed to reduce risk, is a dependent trade over a predetermined time frame. A stop-limit order ensures execution through online forex trading brokers, whereas a stop-limit order ensures price.