A question arrives from reader Tony B…
“If the market was above the eurusd figure [the price he wants to buy at] how could I have placed the limit buy orders please? Should I put an alert on to wait for the market to drop?”
Now Tony is one of our 4DFX members. He’s getting ready to place his first trades.
And in 4DFX we use LIMIT orders to enter the market. This lets us set our traps in the markets we trade – we lie in wait at strategic price levels on a ‘set and forget’ basis.
But if you’ve been more used to breakout-style trades, using STOP orders to get in, or even using bog standard MARKET orders – i.e. just hitting the buy or sell button – LIMIT orders can seem a bit confusing.
So I thought I’d go into a bit of detail today.
Here’s everything you need to know about using STOP and LIMIT entry orders
So instant execution orders are fine when you want to get into the market quickly, and providing you have a legitimate reason for doing so!
But what about the other available options?
What if you have an idea that doesn’t need you in the market immediately, but perhaps depends on the price action fulfilling particular criteria first?
Well, that’s where the ‘pending’ order types come into play…
Here’s a screenshot of the drop-down list you’ll see when you select pending orders:
There are four basic types of new order when you trade:
Let’s have a look at Stop orders first…
Stop orders are good for getting into breakout trades.
You can place a Buy Stop order above the current market price and your order will be filled only if the market trades up through your designated price.
So instead of sitting at the screen for hours, waiting, you could use a Buy Stop entry order to get you into the trade. It might look like this:
Using a Buy Stop order for strategic trade entry
Sell Stop orders work in a similar way only you’d use them to strategically enter your trade at a LOWER price than the current market.
Limit orders are great at getting you into trades when you have identified a good support or resistance level to use.
A Sell limit order would be used to enter a short position at a higher price than the current market.
This might sound a bit odd – why would you want to sell if the market is moving higher?
So let me show you an example on the chart
Buy limit orders work in a similar way – you’d place them below the current market to enter a long position but only if the market actually dips down to the price you specified.
So you can see from the chart example that the limit order is another way of strategically entering trades.
It can help you achieve really good prices for your trade entries. But there is one drawback: if the market doesn’t quite reach the price you specified, you’d miss the trade!
One way the professionals handle this problem is to ‘scale into’ a position by having limit orders spaced out by a few pips below the resistance level they are using. This way, their worst case is missing getting filled on just a small part of the intended position instead of the entire trade.
So both pending order types – the stop orders and the limit orders – allow you to be selective about entering trades.
It means that you don’t have to follow along in real time to execute your trading ideas and you don’t have to rely on price alerts or anything, plus they can help with your discipline because they force you to actually have a plan in place before you submit the order – no excuses for random trade entries!
And just to wrap things up, here’s an easy overview of where you’d use each order type in relation to the current market: