Limit orders can help you get a better price on your currency investments.
Know which way the market’s moving? Then you may want to start placing limit orders. These “hedging” tools can help you get better deals on currency trades if you make the right predictions.
What is a limit order?
With a limit order, you set instructions to prevent your transaction — a forex trade or money transfer, for example — from being executed until the market price reaches your specified exchange rate.
Why is a limit order useful?
Maybe you think a currency is overvalued right now. If so, you can place a buy limit order, which means you’ll only buy the currency if it becomes available at a more attractive price.
You’re not only limited to buy limit orders — you can also place a sell limit order. For example, let’s say the dollar-to-yen rate is USD/JPY = 110 — meaning $1 buys 110 yen. If you want to sell the USD/JPY pair (or sell your dollars for yen), you could place a sell limit order at USD/JPY = 111. If the market reaches that exchange rate, your brokerage executes your limit order — and you acquire yen at a better price.
Basically, a limit order allows you to guarantee the price you’ll buy or sell a currency at.
Limit orders: An example
Let’s say the euro-to-dollar currency pair is currently at EUR/USD = 1.1 (meaning 1 euro buys $1.10). You want to buy euros with your dollars, but you want to wait until the euro becomes a bit cheaper.
In this case, you could place a buy limit order at EUR/USD = 1.08. When the market reaches that exchange rate, your brokerage executes your buy limit order, get you euros at a better price.
Compare providers that can help you set up limit orders
Are there any drawbacks?
Drawbacks for limit orders often come from missed opportunities. Investors can be wrong about where the market is headed, leading to ill-timed limit orders.
Maybe you think the euro will go down — but what if it keeps going up? If you placed a buy limit order hoping the euro would go down, you may now be kicking yourself for doing so.
What else should I know?
A limit order is different from a stop-loss order. With a limit order, you’re looking for a price that’s better than your target price (whether you’re buying or selling). On the other hand, a stop-loss order prevents executing a transaction at a price that’s worse than your target price.