when do you use limit and stop order in forex trading?
Great question Pat!
First of all, I want to clarify that limit orders could be either "buy limit" or "sell limit"; and stop orders could be either "buy stop" or "sell stop" orders. They are all classified as pending orders and they are placed in advance before price reaches them.
Limit orders can be executed at the price you specified or better, while stop orders can only be executed at the price you specified.
A buy limit order enables you secure a price below the current price so that when the price falls and reaches it, then it is triggered and you buy for cheaper. Even if the price gaps past it, it will still be executed at the next price.
A sell limit order enables you secure a price above the current price so it is activated when price rises and touches it. It also helps you sell for higher. Even if the price gaps past it, it will still be executed at the next price.
A buy stop order can only be placed at a price above the current price but it comes with a stop function/order such that if the price you set it at cannot be gotten, the order will be closed and not executed.
A sell stop can only be positioned below the current price and it also comes with a stop function/order so that if the price you set it at is unavailable, the order will be closed and not executed.
Personally, I do not use buy or sell stop orders because they are high risk and require going against healthy risk management rules of buying low and selling high.
I prefer to use limit orders because they encourage risk management of buying low and selling high, and they can be executed at a better price than I had specified.
A buy stop order is used to target market entry at precise price, if that price is not available, the buy order will be "stopped" and will not be executed. Buy stop order must be placed above the current market price. So if the current EUR/USD price is 1.15940 you must place the buy stop to be triggered at a price higher than 1.15940. The sell stop order is just the reverse of the buy stop and is used when you want to sell below the current market price.
A buy limit order is used when you want to buy at a price lower than the current market price, so it must be set under/below the current market price. The sell limit order is just the reverse.
Both stop and limit orders fall under the 'pending order" category and are set in advance then you wait for price to get to it and trigger it.
Assume you want to go out for lunch and you want a trade to be executed after price gets to a certain level, you simply set your pending order and go out.