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When trading with an online broker, you should definitely know what orders are the best for your needs. The orders should be placed accordingly to how you want to trade. Let’s take look at the most important things to know about stop orders in theworld of forex trading.
Stop Order
A stop order is an order that transforms to a market order once a specific price has been reached. You can use it to enter a new position or to exit an existing one.
A buy-stop order is an order to buy a currency pair at the market price once the market reaches a specified price or even higher. The buy price should be higher than the current market price.
Meanwhile, a sell-stop order is an order to buy sell the currency pair at the market price once the market hits your specified price or lower. The sell price should be lower than the current market price.
You can use stop orders to enter a trade when you trade breakouts.
For instance, image a currency pair is rallying toward a resistance level, and according to your analysis, if the pair breaks above the resistance level, it will continue to move higher.
To trade this belief, you can place a stop-buy order a few pips above the resistance level so that you can trade the potential upside breakout.
If the price later reaches or exceeds your specified price, this will open a long position.
You can also use an entry stop order if you want to make a downside breakout. You can place a stop-sell order a few pips below the support level so that when the price hits your specified price or goes lower than it, your short position will be opened.
Stop order can be used to limit your losses.
Each one has to incur losses from time to time, but what really hits your bottom line is the amount of your losses and the way you manage them.
Before you enter a trade, you should already have an idea of the point where you want to exit your position in case the market turned sour.
One of the most effective ways of putting a cap on your losses is via a predetermined stop order, which is commonly known as stop loss order.
If you have a long position on a currency pair, you will want the pair to increase in value. To avoid the chance of stacking up massive losses, you can put a stop sell order at a specific price so that your position will automatically be closed when that pre-determined price has been reached.
You can use stop orders to protect your profits
Once you have gained some profits on your trade, you can switch your stop loss order toward the profitable direction to lock in some of your profits.
For a very profitable long position, you may move your stop sell order from the loss to the profit area to protect against the chance of incurring massive losses in case your trade doesn’t reach your profit target and the market moves against you.
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