What Is “Buy Stop” “Sell Stop” “Buy Limit” “Sell Limit” In Forex?
In forex trading, there are different orders that make selling and buying of currency pairs easy. Orders are offers that traders send to open or close transactions. To do this, traders use trading platforms such as IG and XTB Online Trading.
While there are several order types, they fall into two main categories:
· Market order
· Pending order
This is an instantaneous order triggered against a broker’s set price. Here, you can only sell or buy an asset at the best price. A market order is similar to how you’d buy an item on online platforms such as Amazon. If the price favors you, you just click once and the item is yours.
Same case applies to forex trading. For example if the current bid price for GBP/USD is 1.3240 while the ask price is 1.3243, you’d buy at exactly 1.3243 and hope that’s the exact price upon execution. Why? Because the final price might be different to the selected price due to several market factors.
Unlike a market order, a pending order executes once pre-defined conditions, which the trader sets, are met. In short, you do not want to buy or sell an asset at the current market price, but rather at a future price. There are four types of pending orders. They include:
· Buy stop
· Buy limit
· Sell limit
· Sell stop
Let’s look at each.
What is buy stop order?
This is an order that allows the broker to purchase a security once the price of the security reaches a pre-specified price. It can either be a market or limit order that becomes executable at the next price level.
Traders use buy stop to reap maximum profit from an upward movement in the market. It is also used to limit the losses if you have placed a short position. Not only can you use it in forex trading but also derivatives, stocks, and others.
While several investors use it for profits, most will use it to protect themselves against unlimited losses. This is especially the case with short traders. Once an investor places a short position, they anticipate the price will fall. However, should the price rise, the buy stop will prevent from unlimited losses. In this case, investors term it as a stop loss order.
For example, if a stock is trading in the range of $10 and $20, a trader may bet the price will break out causing an increase in its price. As such, she might place a buy stop order at $20.50. If the stock hits the price, it becomes a market order causing the system to purchase it at the next price.
What is sell stop order?
A sell stop order initiates when we are selling. You must place a specified stop price at which to sell your security. Once the market price of the security reaches the stop price, the system will trigger a sell order. It allows for a minimal slippage since there’s a difference between the stop price and the next available market price.
On most trading platforms, the sell stop order will initiate if the stop price is higher than the current market for a buy order and below the current market price for a sell order. Like the buy stop order, traders use it to manage profits or limit unlimited losses.
What is buy limit?
This is an order that allows a trader to purchase an asset at or below a specific price. As such, the trader dictates what to pay for the asset. This means there is a guarantee to pay for the asset at the set price or lower.
That said, there’s no guarantee that the order will be fulfilled. The trader only pays for the asset once the price reaches the specified price. If this is not fulfilled, he or she misses the trade. Traders that expect the price of the asset to fall usually use the buy limit order.
One chief benefit of this order is the trader can enter a trade at a precise position without worry of spending more than they want. For example, if an asset is trading at $3.50 and a trader places a buy limit at $3.00, the trade will execute once the price reaches $3.00. In short, a trade happens once the price movement reaches the pre-defined price.
Also, you can benefit from price improvement from one trading day to another. That is, if the price movement did not hit the $3.00 mark during the trading day, as long as the trade remains open, a gap down can benefit the trader. Should the price open on the following day at $3.00 or below, the trader takes the profit.
To place this order, come up with your limit price which is the maximum amount you are willing to stake. Once the price of the asset reaches this price, the order will be triggered. Another aspect to consider is the expiry time.
Here, you can decide to stop your trade at the end of the trading day. Alternatively, you can choose to place it as a good ‘til canceled order. This means it will remain open until the price hits the buy limit or you decide to close the trade.
What is sell limit?
This is the price at which a trader wishes to sell an asset in the future. This price is higher than the current market price of the asset in question. This is in anticipation that the price of the asset will decline in the future.
What is buy limit in MT4?
A buy limit allows you to buy an asset at a lower level than the current market price. That means, if the current market price is $30 and your buy limit is $20, the position will open once the price reaches the $20 mark.
What is the difference between buy stop and buy limit in forex?
Buy stop order
A buy stop order is a combination of the stop-market and buy orders. It is a pending order since it depends on the movement of the market until it is fulfilled. It is placed above the current market price meaning you can use it for bullish market entry. It can also be used as a stop loss in a bearish market.
A buy stop order can be used for new long positions. This allows the trader to enter the market with a price action such as for breakout or momentum trading strategies.
Buy limit order
As mentioned, it is fulfilled once the price of the asset hits the pre-specified price. Like the buy stop order, it is defined as a pending order since it rest on the market for execution. You can use it to realize profits when in a short position or enter the market in a long position.
· You place a buy limit order below the current price while the buy stop order is placed above the current market price.
· Buy limit order is executed at a specific or better price while the buy stop order is executed at the best price.
· Buy limit orders can be carried forward to the next day without worry of obnoxious losses.
· Buy limit orders allow for precision while buy stop orders are intended for entering and exiting the market once the trade is executed.
Other types of forex orders
While the above are the most used forex orders, there exists other weird orders. Let’s look at them.
Good `Till Canceled (GTC)
A GTC order will remain open until you decide to close it. As such, your broker cannot close it on your behalf. However, brokers will have a maximum period, which the position can remain open. Often, most brokers will give you a 90-days window.
Fill or Kill (FOK)
This order is popular with day traders. It instructs that a specific order size should be traded within a short period, often seconds. If the set conditions are not met, the system should cancel the order.
Good for the DAY (GFD)
Here, an order will remain active until the end of the trading day. And since forex is a 24-hour market, you should consult with your broker to know when your country’s trading day ends.
This order involves two sets of orders. One is placed above the current market price while the other is placed below it. If either of the orders is executed, the other is canceled. For example, if CAD/USD is currently trading at 1.3040, you can place a buy order at 1.3050 and a sell order at 1.2040.