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Using limit orders on currency trades
A limit order can help you save money on future 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?
A limit order allows you to choose a target exchange rate for a forex trade or money transfer – that is, the rate at which you are hoping to convert your euros into another currency.
This is a very flexible option that effectively allows you to keep pace with market developments and get an exchange rate that you’re happy with. You can leave your order in place for up to six and in some cases, even 12 months. If your desired exchange rate is achieved then the order is triggered. However, the order simply won’t be placed if the target exchange rate does not occur.
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 = 1.10 (meaning 1 euro buys 1.10 US dollars). You want to buy dollars with your euros, but you want to wait until the dollar becomes a bit cheaper.
In this case, you could place a buy limit order at EUR/USD = 1.13 (meaning 1 euro buys 1.13 US dollars). When the market reaches that exchange rate, your brokerage executes your buy limit order, getting you more dollars at a better price.
Pros and cons of limit orders
- 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.
- 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.
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.
Frequently asked questions
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