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.
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 risk-free demo account.
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