Limit orders are used when the trader wants to buy at a price that is below the current offer, or sell at a price that is above the current bid. Like the stop order, a limit order is contingent on the price. In other words, a limit order is only executed when the current bid or offer reaches a specific limit price as set by the trader. Limit orders to buy deal on the quoted offer and must be set at a price that is below the current offer. Limit orders to sell deal on the quoted bid and must be set at a price that is above the current bid. Limit orders are assumed to be good-till-cancelled meaning that they will operate day after day until filled or until they are cancelled by the trader.

For example, say that a trader who believes that the British pound will strengthen against the U.S. dollar has just bought a mini contract at 1.8333. If the British pound strengthens, the trader will earn profit. The trader wants to close the trade if profit reaches $100. Since every pip of this mini contract is worth $1, the trader will enter a limit order to sell one GBP/USD mini contract at 1.8433. Now, if the GBP/USD bid ever rises to 1.8433, then the limit order will be filled and this will close the British pound position. There is, of course, no guarantee that the British pound will increase so, to be safe, the trader should also enter a stop order to cap loss as was described in "Using Stop Orders". With both the limit and stop order in place, the trader can sit back and watch what happens. As soon as one of these orders is filled - either the stop or the limit - then the other order must be cancelled by the trader.

Let's look at a limit order to buy. Say that a trader who believes that the British pound will weaken against the U.S. dollar has just sold a mini contract at 1.8329. If the British pound weakens, the trader will earn profit. The trader wants to close the trade if profit reaches $100. Since every pip is worth $1, the trader will enter a limit order to buy one GBP/USD mini contract at 1.8229. Now, if the GBP/USD offer ever drops to 1.8229 then the limit order will be filled and this will close the British pound position. Once again, there is no guarantee that the British pound will fall so, to be safe, the trader should also enter a stop order to cap loss as was described in "Using Stop Orders". With both the limit and stop order in place, the trader can sit back and watch what happens. As soon as one of these orders is filled - either the stop or the limit - then the other order must be cancelled by the trader.

See Also:
Using Market Orders
Using Stop Orders

Home > Forex > Using Limit Orders

DISCLAIMER:  Futures Trading involves a huge risk of financial loss!  FuturesKnowledge.com is a traders research and resource site - and is not meant to be used as a guide for trading.  Due to the large risk involved - we highly recommend that you consult with a number of different resources before attempting to invest in the futures, commodities, options, or any other market we report on.

Copyright © FuturesKnowledge, 2006.   All rights reserved.