Difference Between Stop Order, Market Order, Limit Order

Most new forex traders sit in front of their computer for the first time and don’t really know how to place their first order. While most forex trading platforms are different, there are many similarities. One similarity is the different types of orders and when to use them. Let’s take a look at the three most popular:

Stop Order – There are two types of stop orders. The first is a protective stop order to close a trade when the market moves a specified amount against your position. If you bought the EUR/USD at 1.3800 and wanted to limit your risk to 50 pips, you would place your protective sell stop 50 pips below your entry or at the 1.3750 level. If you sold the EUR/USD at 1.3798 and wanted to limit your risk to 50 pips, you would place your protective buy stop 50 pips above your entry or at the 1.3848 level. You can also use a stop order to enter into the market. These orders can be used for trading breakouts. If you thought the EUR/USD would rally further after a move above the 1.3900 level, you would place a buy stop for entry at 1.3901. As the market printed 1.3901, your buy stop would become a market order and be filled at the next best price available. If you thought that the EUR/USD would continue moving down if it traded down through the 1.3700 level, you would place your sell stop for entry at the 1.3699 level. As the market printed 1.3699, your sell stop would become a market order and be filled at the next best price available.

Market Order - A buy or sell order in which the trader wants to execute the order at the best price currently available. Also known as “at the market”. If you can buy the EUR/USD at 1.3800 and sell the EUR/USD at 1.3798, those are the market prices with a two pip spread. If you buy “at the market”, you would be filled at 1.3800 and if you sell “at the market”, you would be filled at 1.3798.

Limit Order - There are two types of limit orders. The first is a limit order to close a trade when the market moves a specified amount to the advantage of your position. If you bought the EUR/USD at 1.3800 and wanted to exit when your trade showed a profit of 100 pips, you would place your sell limit order 100 pips above your entry or at the 1.3900 level. If you sold the EUR/USD at 1.3798 and wanted to exit when your trade showed a profit of 100 pips, you would place your buy limit order 100 pips below your entry or at the 1.3698 level. You can also use a limit entry order in an attempt to get a better entry price. If the EUR/USD is trading at 1.3800 and you thought it would trade down to 1.3750 before rallying, you would place your limit order to buy at 1.3750. If the EUR/USD is trading at the 1.3798 level and you thought it would rally up to 1.3850 before selling off, you would place your limit order to sell 1.3850. When using a limit order, you will only be filled at the price you designated or better