What are Limit and Stop-Orders?
If you place a Limit or a Stop-Order, you are not placing it at the current market price - instead, you want the orders to be executed as soon as the price of the trading instrument hits the price you specified.
There are two main differences between Limit and Stop Orders:
- The limit order will only be executed at the specified limit price or higher. In contrast, once a Stop Order triggers at the fixed price, it will be executed at the most suitable price in the market, which means that it could be significantly different from the stop price;
- The Market can see a Limit order; however, a Stop Order can't be seen until triggered. This happens because the client sets a specific execution price for Limit orders, while in Stop orders, the price is unknown until the order is triggered.
A Limit Order is an order to buy or sell a trading instrument at a specified price. A Sell Limit Order can be executed at the limit price or higher; Buy Limit orders are executed at the specified price.
- Traders usually place limit orders to get a better deal and/or to control the buy/sell prices;
- You only buy or sell the trading instrument at the price you specify or higher;
- MetaTrader deducts the margin for the limit order from your balance and keeps it, until the order is executed, canceled or expired;
- The Limit Order execution is not guaranteed. A Limit Order can only be executed if the market price of an instrument reaches the limit price. Although Limit Orders are not guaranteed to be executed, they help ensure that you don’t pay more than the predetermined price;
- Traders can set a limit order indefinitely or with an expiration date.
For example, the EURUSD currency pair is trading at 1.1000, and you have a limit entry order to buy at 1.1009. The trading platform will not execute your order unless you get hit at a 1.0009 price.
A Stop Order is an order to buy or sell a trading instrument when its price moves past a particular point, ensuring a higher probability of reaching a predetermined entry or exit price. Once the price crosses the predefined entry/exit point, the stop order becomes a market order.
A Buy or Sell Stop order triggers a market order when the offer price is met. Both types of Stop Orders are executed at the best available price set by the trader, depending on the available liquidity.
- Stop orders allow you to reduce your losses or minimize the reduction of profits;
- You can't control the buy/sell prices. Once the price you enter is hit, your stop order turns into a market order, and you'll get the best available market price;
- The funds for stop-buy orders aren't deducted from your available balance until your order is completed. Thus, it's your responsibility to keep enough funds in your account to ensure your stop-buy order goes through if the price is met.
For example, the EURUSD currency pair is trading at 1.1000, and you have a stop entry order to buy at 1.1009. If there was no slippage in the market, the trading platform will execute your order when the price gets hit at 1.1009.
Slippage can occur during periods of increased volatility, as well as when a large order is executed, but there is not enough volume at the selected price to maintain the current level of the spread between the buy and sell prices. Slippage refers to all situations in which a market participant receives a trade execution price that is different from the expected one.
Stop and Limit Orders are great ways to participate in the Forex and Stock market and serve as the main options for opening orders for experienced traders. It’s impossible to say which of the indicated order execution methods is better because Stop and Limit Orders have different purposes and are suitable for different strategies.