Always Use Stop and Limit Orders

There are many lessons to be learned in the foreign-exchange market, many of which can only be discovered with time. However, in this article, we want to share just a few extremely important ideas, which you should incorporate into your Forex trading instantly.

The idea is based on the fact that you should limit your losses, whilst allowing your profits to run and accumulate. So many people fail in Forex trading because they do the opposite of what we just said. That is, they allow their losses to accumulate, and take their profits too early.

But many people will argue that it is impossible to allow profits to accumulate, whilst limiting losses if they are not at their computer the whole day. Indeed, it would seem at first glance that if you weren’t able to execute a trade at a moment’s notice, you would run the risk of missing a particular opportunity, and therefore face either a large loss or a “been and gone” profiting opportunity.

The Trader’s Solution

A solution to this dilemma was thought up long ago by the foreign-exchange industry. Thanks to the clever innovations of technology, you are now able to use something called stop and limit orders on each of your open trades, which regulates the levels to which you will allow the currency pair to approach before the trade is closed.

Let’s illustrate stop and limit orders with an example.

  • Currency Pair = EUR/USD
  • Entry Price = 1.4500

This is a simple trade, whereby we have bought the EUR/USD currency pair, hence we are wanting the quoted price to rise in order to make a financial profit. Let’s say that we only have a limited amount of capital in our account, and hence only want to face a maximum loss of 100 pips.

Our stop order would, therefore, be placed at 1.4400

This means that if the quoted price for EUR/USD touched 1.4400, our open trade would be automatically closed, with a loss of 100 pips. Even if the price continued downwards to 1.4200 whilst we were sleeping, our trade would have been automatically executed at the 1.4400 level.

The same is the case for profits. Let’s say that we wanted to take profit at 1.4550 – for 50 pips profit. We could place a “limit” order at this level, so that as soon as 1.4550 was touched, our trade would be closed and we would realize a profit, regardless of whether it was day or night.