Forex Limit Order Strategy: How it Works and Why it’s Important

In the world of forex trading, where you trade the price of one fiat currency against another, precision, strategy and a solid understanding of order types is essential to prevail in the markets.

Among these order types are limit orders which play a key role in helping traders execute trades at predefined price levels. This gives you more say over your entry and exit points for a trade. It means you can plan ahead, avoid impulsive trades and capitalise on favourable market conditions.

What is a Forex Limit Order?

A forex limit order is a trading instruction to activate a buy or sell order at a specified price or better. Limit orders are widely used to make sure trades are executed at favourable price points without constant market monitoring.

There are two types of limit orders you can place:

• Buy Limit Order
  What is a buy limit in forex trading? Put simply, it’s an order placed below the current market price. It only activates when the price falls to the predefined level, essentially buying the currency pair below the current market value.
• Sell Limit Order
  What is a sell limit order in forex trading? This is an order placed above the current market price. It only activates when the price rises to the predefined level, allowing you to sell a currency pair above the current market value.

How a Forex Limit Order Works

A forex limit order makes it possible to set the price at which you’re prepared to buy or sell a forex pair – you’re in control.

Here’s how a forex limit order strategy works:

1. Calculate your desired price
   Set the exact price that you’re comfortable with your buy or sell limit order being executed.
2. Submit your order
   Use your broker’s supported forex trading platform to input the details of your buy or sell limit order. Submit the order, defining the currency pair, price level and lot size. There are several forex brokers which are happy to serve beginner forex traders, namely N1CM, TitanFX and our top-rated FXGT.
3. Wait for the order to execute
   Sit back and wait to see if the market hits the predefined price point, at which point the limit order is triggered.
4. No guarantee of execution
   The golden rule of a forex limit order is that there’s no guarantee it will trigger. If the market never reaches your predefined price, the order will be unfulfilled.

Benefits of Using a Forex Limit Order Strategy

• Enhanced control over your entries and exits
  By ensuring trades are executed at price levels you’re comfortable with, you can be sure of finding entry points that may be more likely to generate profits, such as support and resistance levels.
• No need for constant market monitoring
  With all limit orders preloaded into your forex trading platform, you can sit back and let the software do the work, giving you more time to research other trading opportunities or potential brokers to try to generate cashback from your trading activity.
• Guards against impulsivity
  All forex trading entries are planned in advance using limit orders, protecting your trading bank against impulsive decisions like chasing losses or feeding a ‘fear of missing out’ (FOMO).
• By removing the emotion from trades it encourages forex trading discipline
  With your head ruling your heart, you’ll be making strategic forex trading moves for the long-term good of your trading bank.

Common Scenarios for Using Limit Orders in Forex

There are various instances where a limit order may prove the sensible choice when trading the forex markets, including:

1. Entering a trade during a pullback
   You may be expecting an upward trend to reoccur after a recent pullback in the price of a forex pair. In this scenario, you would submit a buy limit order at a lower price, with the aim to enter the market just before it spikes back upwards.
2. Lock in profits at a set price
   It’s also possible that a sell limit order can be used to automate locking in profits. You can define a price at which you close your position, securing a return without having to stare at your trading platform constantly.
3. Targeting buy limit orders at support levels and sell limit orders at resistance levels
   By entering buy limit orders at support levels, you’ll have the best chance of entering the forex pair when it starts to rebuild upward momentum. Similarly, submitting sell limit orders at resistance levels means you’re more likely to get a return from shorting a forex pair at a level where sellers have historically outweighed buyers.

Market Order vs Limit Order

There’s a time and a place for both market orders and limit orders when forex trading. A market order is beneficial when time is of the essence, and you just want to open a position on a forex pair, no matter the entry price. A market order essentially executes a buy or sell order immediately at the next best available value.

At the other end of the spectrum, limit orders execute when the market hits predetermined prices, which means you may never get filled if the market never hits the desired price.

Appreciating the trade-offs between price certainty and execution certainty are important to pick the right order types for the right forex trading strategies and market conditions.