There are many different orders you can choose from when it comes to trading. Each type of order functions differently from each other, and they affect your trades differently too. One of these orders is the limit order.
What is a limit order?
A limit order is put when you are only willing to enter a new position or to exit a current position at a specific price or higher. The order will only be filled when the market trades at the specified price or higher than that.
A limit-buy order is an order to buy a pair at the market price once the market reaches you specified price or lower. The price must be lower than the current market price.
A limit-sell order is an order to sell the currency pair at the market price once the market reaches your specified price or higher. The price must be higher than the current market price.
You typically use limit orders when you enter a market where you fade breakouts.
And you fade breakouts when you don’t think the currency price will break successfully past a resistance or a support level.
In other words, you believe the currency price will bounce off the resistance to go lower or bounce of the support to go higher.
For instance, imagine that based on your analysis of the market, you think that the pair’s current rally is not likely to break past a resistance successfully.
Thus, you think that it would be a good time to short when the pair rallies up near that resistance. To take advantage of this assumption, you can place a limit sell order a few pips below the resistance level so that your short order will be filled when the market moves up to that specified price or higher.
You can also go long near a support level.
For example, if you believe that there’s a high chance that the price’s current decline will pause and reverse near a particular support level, you may want to grab the chance to go long when the pair decreases to a level near that support.
In this case, you can place a limit-buy order a few pips higher than that support level so that your long order will be filled when the market moves down to that specified price or lower.
You can use limit orders to set your profit targets
Before you place your trade, you should already have an idea of where you want to take profits should the trade actually plays on your favor.
A limit order enables you to exit the market at your pre-determined profit goal.
If you go long on a currency pair, you can use the limit-sell order to place your profit objective. On the other hand, if you go short, the limit-buy order should be used to place your profit objective. Remember that these orders will only accept prices that lie in the profitable zone.