Using limit orders on currency trades

A limit order can help you save money on future currency investments.

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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.

How do limit orders work?

A limit order allows you to guarantee the price you’ll buy or sell a currency at. There are two types:

  • Buy limit orders. Placing a buy limit order allows you to set a price you want to buy your desired currency at. Once the currency drops to your specified price, the exchange will be made automatically.
  • Sell limit orders. A sell limit order allows you to set a price you want to sell the currency you currently have at. Once the rate rises to your specified price, the exchange will be made automatically.

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 US dollars). 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, getting you euros at a better price.

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Pros and cons of limit orders

Pros

  • Allows for more hands-off trading. Once you set your limit order, it’ll be fulfilled automatically when the currency reaches the set price — even if you’re not online to make the trade.
  • Increases likelihood of making a profit. You can choose to set limits that will turn a profit when your order is filled. But if your order isn’t filled, you could need to adjust your limits.

Cons

  • Orders aren’t always filled. If your chosen investment never hits the price you want, the order will never be filled.
  • Can reduce potential profit amounts. For example, if you set a sell limit order and it’s fulfilled but a currency continues to skyrocket, you could lose out.

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.

Bottom line

Limit orders are one potential tool that can be used to help you trade foreign currencies and other investments. But they’re not the only choice. If you’re new to trading, learn about hedging options and consider consulting a professional.

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