What is Limit Order
There are two limit orders, buy and sell. Buy or sell limit order have logic in a way that the current price on the market must first reach that level in the direction, for buy(bear market) or for sell(bull) and then order will be triggered.
That means when you want to use the Buy Limit order market price must move in bear direction(short – DOWN) from current position and when price reaches a certain level you have defined, a level at which you have set pending buy limit order then order will be triggered.
When you want to use the Sell Limit order market price must move in bull direction(long – UP) from current position and when price reaches a certain level you have defined, a level at which you have set pending sell order then order will be triggered.
Generally meaning is, you expect that the market will change direction when price reaches the level you expect.
Limit order is used mostly in swing trading where traders expect that trend will reverse. Limit orders are placed mostly on a confluence level where several indicators meet and indicates that price could reverse.
Let me explain this with examples. It will be easier to understand.
What is a Buy Limit Order in Forex
As explained above, limit order is when you wait for the price to reach a certain price level and then reverse back.
Buy limit order in Forex is the case when you have price falling down. The price of a base currency is losing value.
On one level you expect the price will change the direction. You expect that the price will reverse back and it will move UP.
The change will be from bearish sentiment to bullish sentiment.
On that level you open the buy limit order and wait for the price to come down. When the price reaches that level it will automatically activate and you will have open order. There is no need to sit in front of your computer or smartphone and wait for the price to activate the buy limit order.
Everything will be done automatically.
If you shut down your PC or smartphone your buy limit order will still be activated. The reason is that your order is sent to the broker server and your buy limit order details, like entry level, stop loss and take profit level are saved on the server.
Those data are not saved on your PC or smartphone so there is no worry they will be cancelled once you turn off your PC or smartphone.
Buy Limit Order Stop Loss
Buy limit order can have other details set like stop loss and profit level. Stop loss is very important because you do not want to have buy limit order activated without stop loss.
If the trade becomes a losing trade you want to cut your loss and have the buy limit order closed.
If you do not set a stop loss you can expect that the price will not reverse and you lose your money. And without stop loss the only level that can close your order is margin call.
Margin call will be activated when your account balance loses the majority of the money. That is not something you want to happen to you.
Buy Limit Order Profit Level
Profit level is also good to set because if you are not following the market when your buy limit is activated you can expect that the order will close when you reach target level.
Without a profit level set it can happen that the market reverses and reaches your target level, but it does not close. Then the market can continue to fall down and reach your stop loss level.
That is the case you do not want to happen. The case when your order is profitable and then close as losing one.
To avoid that you should always set a profit level so you make money when the market reverses from the buy limit entry point.
How to Open Buy Limit Order
In the image below I have made one example to simplify the whole process of Buy Limit order.
Think in this way when you want to explain to yourself how Buy Limit order works.
If you want to Buy EUR/USD currency pair in the future at a price that is lower than current market price(example – 1.12778) you will activate the Buy Limit order. Meaning, you expect that the market will move in bull(UP) direction when EUR/USD price reaches level 1.12110.
This way you expect by your trading strategy that the pair must come to 1.12110 level and then the price will reverse and start to move up. If price does not reach that level you do not expect that it will reverse and your trade will not be activated.
How to Open Buy Limit Order in Metatrader 4 – Example
Now let’s see what it looks like when you want to open a buy limit order in Metatrader 4 trading platform.
You need to select a new order on the Metatrader 4 and the order window will open. Here you need to select:
- Order Type
- Pending Order
- Buy Limit
- which lot size do you want to open
- at which price order will open
- Stop Loss
- at which price your order will close if order becomes losing trade
- pay attention that stop loss must be under price you have set to open buy limit order
- Take Profit
- at which price your order will close if order becomes profitable one
- pay attention that take profit must be above price you have set to open buy limit order
Those are the main conditions you need to fulfill before you can open order. When you have entered correct data you will have a “Place” button available to select. If some of the data is not correct you will not be able to select the “Place” button which is helpful.
It says to you that there is error in entered data.
Buy Limit Order Example
Mostly error is in Price or Stop Loss/Take Profit levels because traders cannot understand how to enter correct values for the Buy Limit order.
When you enter the correct data and activate the “Place” button you will get a confirmation message as image below. It says to you that you have placed buy limit order at specific price with SL(Stop Loss) and TP(Take Profit) levels.
You need to confirm the message by pressing the “OK” button.
When you take a look into the chart you will see your buy limit order. There are three lines on the chart indicating your buy limit price, stop loss and take profit levels.
As you can see my buy limit price(1.12110) is under current market price(1.12800), my stop loss(1.11900) is under buy limit price and take profit price(1.12500) is above buy limit price.
I am expecting that price after it hits my buy limit order at 1.12110 it will reverse and rise UP and when it hits 1.12500 order will close and I will earn money.
Know that you can close your order whenever you want. You do not need to wait, take profit level or it hits you to stop loss.
If you are watching the market live and you see that the market could reverse earlier than you thought at the first time, you just open the order window and close it.
That way you reach earlier if you see possible problems and take the profit before it hits your stop loss or you can prevent bigger loss if the trade becomes losing trade.
Buy Limit Expiration Date
As you can see at the beginning of opening a buy limit order in Forex you have the possibility to set an expiration date.
That is the setting that will close your order if your order does not open up to that date.
For example, if today is 01.02. and I set the expiration date to 15.02. the trading platform will close my order if the price does not reach my entry level.
This is useful for you because you can cancel the buy limit order if the price does not play as you thought it could.
Your strategy for buy limit order can be valid for a day or few days. And to prevent some problems in the future after your strategy is no more valid you use the expiration date to close pending buy limit orders.
Buy limit order in Forex is a very good tool to have if you are using swing trading.
Swing trading is when you expect that the price will change direction somewhere in the future at the certain level.
Buy limit order have other details like stop loss and profit level which you should use each time to use the most of the buy limit order.
One of the strategies you can use to set buy limit order is to place them on the confluence level. Confluence level is where several support or resistance lines cross.
That area will give more chances to buy limit order be a profitable trade.
Now read more about other order types you can use in Forex.