Buy Limit vs Sell Stop Orders in Forex

Placing buy limit and sell stop orders help employ a price control strategy on forex trades. But the right way to place these forex orders is by understanding the difference between the two. In this article, we take a look at how buy limit and sell stop orders differ and the right time to employ each of them in your trade.

 

What is a forex market order?

A forex market order is a pre-defined order that you place with your forex broker to enter or exit a forex trade at a specific price and time. The order may or may not be executed at the specified or better price, depending on the order type.

 

What is a buy limit order?

A buy limit order enables traders to buy a currency pair at a specified or better market price. The buy limit order is executed as soon as the currency pair price reaches the limit price or is lower. If the currency pair's price remains above the specified limit price, the order will not be executed. For example, let us assume you are trading USD/EUR, which is currently trading at an exchange rate of 2. You can place a buy limit order for USD/EUR at 1.9 at this point. If the USD/EUR price drops below 1.9 or touches 1.9, the order will be executed, and you will enter a buy trade for USD/EUR. However, if the currency pair price remains at or above 2, the limit order will not be executed and will expire.

 

What is a sell stop order?

A sell stop order enables traders to sell a currency pair at a specified or better market price. It is always entered at a price below the prevailing market price. Once the currency pair drops below the specified price, the sell stop order is executed at the current market price. If the currency pair's price moves away from the fixed sell stop order, the order fails and is not completed. For example, let us assume you are trading USD/AUD at an exchange rate of 1.5. You purchased ten units of the currency pair for $15. The currency pair starts trading at 2 due to a positive economic report in Australia. At this point, if you wish to gain at least $0.2 from each unit of the pair purchased, you will place a sell stop order at 1.7 per currency pair. Hence, as soon as the currency pair prices start dropping and touch the 1.7 level, your sell stop order will be executed to ensure you lock in the minimum profits you need. However, if the currency pair prices keep increasing and reach a price level above 2, the sell stop order will fail and will not be executed.

 

Buy limit vs Sell stop order: Key differences

1. Functionality

Buy limit orders Since the forex market is a fast-moving market with rapid price fluctuations, limit orders allow traders to control the prices at which they want to trade the currency pairs effectively.

• A buy limit order can be placed right below the currency pair's current trading price to open a long position in a bullish market to enter the trade when the market is moving in your trade's favour.
• A buy limit order can be placed right below the current short entry position of a currency pair in a bearish market to exit the trade if the market moves against your trade.

Sell stop orders Placing a sell stop order is an efficient way to manage risk associated with the forex market's volatility.

• A sell stop order can be placed right below the entry price of a currency pair in a bullish market to exit the long position.
• A sell stop order can be placed right above the entry price of a currency pair in a bearish market to enter a short position.
  
  

2. Visibility

• Buy limit orders: Buy limit orders are directly sent to the market and hence are visible by all market participants in the bid/ask column. Whether the buy limit order is executed or not, each trader in the forex market can look at the buy limit order prices set by each trader. This contributes to the currency price moves in the market as the higher the bid price, the higher the currency pair price move.
• Sell stop orders: Sell stop orders are not visible to the public unless and until they are triggered or executed as they are not directly sent to the market. Forex brokers and market participants cannot track your sell stop orders. This is done to ensure that the prices in the markets are not manipulated just to bring the currency pair price to the level specified.
  
  

3. Trader's intention

• Buy limit orders: A trader uses a buy limit order to lock a price of their choice at which they wish to enter the trade as they are bound to be executed if the price reaches or drops below that level. This helps traders get the best possible price in the market.
• Sell stop orders: A trader uses a sell stop order to minimise or limit their risk and losses. If the currency pair starts moving against your trade, the sell stop order ensures that there is a maximum cap that is put on the potential losses, and the order is executed at the current price as soon as the currency pair drops to or below the specified price.
  
  

4. Trading time

Buy limit orders Trade with a buy limit order when your specified price is better or equal to the current currency pair price in a bullish market that is reversing into a bearish market.

Sell stop orders Trade with a sell stops order when the currency pair price has moved above the price target as markets can potentially reverse after this point.

Understanding order types

What is a limit order and how does it work?

In the forex market, a limit order is placed with a broker that specifies the maximum price a trader is willing to pay for a currency pair or the minimum price they are willing to short-sell it for. This order will only be executed if the market price reaches the specified limit.

• Buy limit order: A trader places a buy limit order if they believe a currency pair is undervalued and expects its price to increase. If the market price falls to or below the specified limit, the order will be executed.
• Sell limit order: A trader places a sell limit order if they believe a currency pair is overvalued and expects its price to decrease. If the market price rises to or above the specified limit, the order will be executed.

For example, let's assume a trader believes the EUR/USD currency pair is currently undervalued and is likely to appreciate. They expect the pair to reach 1.1200 within the next week. The trader places a buy limit order for 10,000 Euros at 1.1150. This means they are willing to purchase Euros at a maximum price of 1.1150. If the market price falls to 1.1150 or lower, the order will be executed, and the trader will purchase 10,000 Euros at the prevailing market price.

What is a stop order and how does it work?

A stop order in forex becomes a market order when a certain price level is reached. It is used to protect gains or limit
losses in a trading position.

• Buy-stop order: A trader places a buy-stop order to limit losses on a short position. When the market price reaches the specified stop level, the order will be executed as a market order to buy the currency pair and close the short position.
• Sell stop order: A trader places a sell stop order to protect profits on a long position. When the market price falls to the specified stop level, the order will be executed as a market order to sell the currency pair and close the long position.

For example, let's assume a trader has a long position in the GBP/USD currency pair at 1.2800. They want to protect gained profits if the market suddenly reverses. The trader places a sell-stop order at 1.2700. If the market price falls to 1.2700 or lower, the order will be executed as a market order, shorting the trader's position at the current market price. The stop order will not be triggered if the market price exceeds 1.2700.

Key principles for trading with buy limit and sell stop orders

Buy limit orders

• Set realistic limits: Base the limit price on technical analysis, fundamental factors, and market trends. Avoid setting limits too far from the current market price, as this may reduce the likelihood of execution.
• Consider market volatility: If the market is highly volatile, setting a wider limit can increase the chances of execution. However, be mindful that a wider limit also increases the risk of entering a trade at a less favorable price.
• Use trailing stops: Consider using a trailing stop order to protect gains in a rising market. This type of order moves the stop price up as the market price rises, locking in gains.
• Be patient: If the limit order is not executed immediately, don't panic. Markets can be unpredictable, and it may take time for the price to reach the set limit.
• Consider the time frame: The time frame one is trading can influence their limit order strategy. For example, if a trader is day trading, they may want to set a tighter limit to capture short-term price movements. If they're swing trading or investing, a wider limit may be more appropriate.

Sell stop orders

• Set appropriate stop levels: Determine a stop price that aligns with the risk tolerance and trading strategy. Avoid setting stops too close to the current market price, as this increases the risk of being stopped prematurely.
• Consider market conditions: A wider stop can help traders stay in the trade and capture more gains if the market is trending strongly. However, if the market is consolidating or experiencing a pullback, a tighter stop may be more appropriate.
• Use stop-loss orders: To limit losses in a falling market, consider using a stop-loss order. This type of order is placed below the current market price and is triggered if the price falls to or below the specified level.
• Review and adjust: Regularly review the stop orders and adjust them as needed based on changing market conditions and your trading goals.
• Consider the risk-reward ratio: The risk-reward ratio is the potential gain divided by the potential loss. When setting a sell-stop order, consider the risk-reward ratio of the trade. A favorable risk-reward ratio can help traders manage risk and improve the overall trading performance.

 

Place buy limit and sell stop orders to avoid market risks

Placing buy limit and sell stop orders help traders with automatic order execution if the markets start trading beyond your expectations. Start trading currency pairs on our platform to automatic order execution with several other market order types. Sign up for a live trading account or try a demo account.