FOREX TRADING STRATEGIES

FOREX TRADING STRATEGIES

How to place limit and stop orders

I want to use this article to show you how and where to place limit and stop orders in forex trading which can also be applicable in crypto-trading.

First off, what are LIMIT ORDERS and STOP ORDERS?

Limit orders are mostly used to protect profits while Stop orders are mostly used to minimize losses.

In two case scenario, we have an open long position and open short position as shown below.

Let's look at the first scenario when we have an open long position for instance, you decide to enter the market and buy stock worth of $600 in a company and hoping to see the price to rise.

The diagram above illustrate the open long position. Our main goal here is to profit $100 from the trade by placing the following limit and stop sell orders in order to protect the profits and losses

From the above diagram, we place a limit sell order at $700 to lock in our profit of $100 in case the stock price reach 700$.
In scenario where our trade analysis is wrong, the stock price might reverse to go against our market prediction by decreasing instead of increasing and this is where the use of stop sell order is applied.
As you can see from the diagram above, we place a stop sell order at $550 to minimize the potential loss at 50$ instead of running total loss if the stock price falls.Note that we enter the market when the stock price is at $600 and we expecting to profit $100 if the price increase to $700.

Now let's look at the second scenario when we have an open short position.

From the above open short position diagram, we enter the market when the stock price is at 600$, and with the hope to profit $100 from the trade if the price fall to $400. As you can see from the above diagram,we place a limit buy order at 400$ to lock in our profit of $100 if the stock price fall to $400. However,if our trading prediction go wrong that means the stock price start increasing instead of fallen, then this is where the Stop Buy Order will be useful to minimize the potential loss at $50.

In summary, we trade an open long position in order to buy and profit, and while that of short position is for us to sell and profit.

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