A:

The high amounts of leverage commonly found in the forex market can offer investors the potential to make big gains, but also to suffer large losses. For this reason, investors should employ an effective trading strategy that includes both stop and limit orders to manage their positions.

Stop and limit orders in the forex market are essentially used the same way as investors use them in the stock market. A limit order allows an investor to set the minimum or maximum price at which they would like to buy or sell, while a stop order allows an investor to specify the particular price at which they would like to buy or sell.

An investor with a long position can set a limit order at a price above the current market price to take profit and a stop order below the current market price to attempt to cap the loss on the position. An investor with a short position will set a limit price below the current price as the initial target and also use a stop order above the current price to manage risk.

There are no rules that regulate how investors can use stop and limit orders to manage their positions. Deciding where to put these control orders is a personal decision because each investor has a different risk tolerance. Some investors may decide that they are willing to incur a 30- or 40-pip loss on their position, while other, more risk averse investors may limit themselves to only a 10-pip loss.

Although where an investor puts stop and limit orders is not regulated, investors should ensure that they are not too strict with their price limitations. If the price of the orders is too tight, they will be constantly filled due to market volatility. Stop orders should be placed at levels that allow for the price to rebound in a profitable direction while still providing protection from excessive loss. Conversely, limit or take-profit orders should not be placed so far from the current trading price that it represents an unrealistic move in the price of the currency pair.

To learn more, see The Stop-Loss Order - Make Sure You Use It, Limiting Losses and A Primer On The Forex Market.

RELATED FAQS
  1. What is the difference between a stop order and a stop limit order?

    Learn the differences between a stop order and a stop limit order. Traders use these as stop losses and regular investors ... Read Answer >>
  2. Are stop orders only used for stocks?

    Learn about sell-stop and buy-stop orders, when and how to use stop orders and what other securities stop orders could be ... Read Answer >>
  3. How can I use a stop order to limit my losses on a long stock position?

    Learn about stop orders, different stop order types, and how to use stop-loss orders and stop-limit orders to limit losses ... Read Answer >>
  4. What is the difference between a stop and a market order?

    Learn about market orders and stop orders, how they are used and executed, and the main difference between stop orders and ... Read Answer >>
  5. What types of investors are best-suited for stop loss orders?

    Use a stop-loss order to mitigate downside risk. Whether you are a conservative beginner or a seasoned day trader, a stop ... Read Answer >>
  6. How do I place a limit order online?

    Learn how a limit order is placed, the types of stocks it is most useful for and the specifications placed with it to suit ... Read Answer >>
Related Articles
  1. Trading

    Protect Yourself From Market Loss

    There are several simple strategies you can use to protect yourself from downside risk.
  2. Investing

    Understanding Buy Stop Orders

    A buy stop order is an order to buy a stock at a specific price above its current market price.
  3. Trading

    Trailing-Stop/Stop-Loss Combo Leads to Winning Trades

    Combine trailing stops with stop-loss orders to reduce risk and protect portfolio value.
  4. Trading

    The Stop-Loss Order - Make Sure You Use It

    It's a simple but powerful tool to help you implement your stock-investment strategy. Find out how.
  5. Trading

    Forget The Stop, You've Got Options

    Using options instead of stop-loss orders adds finesse and control in limiting losses.
  6. Trading

    Increase Your Profits With Soft Or Mental Stops

    A soft stop provides a trader with added flexibility, allowing him to react to ongoing changes in the market.
  7. Trading

    Manage Risk With Trailing Stops And Protective Put Options

    Using the right strategy can lower the risk of failure and protect your profits.
RELATED TERMS
  1. Bracketed Buy Order

    A buy order that is accompanied by a sell limit order above the ...
  2. At Limit

    An order that sets a maximum limit on the buy price and/or a ...
  3. Limit Order

    An order placed with a brokerage to buy or sell a set number ...
  4. Above The Market

    An order to buy or sell at a price set higher than the current ...
  5. Stop-Limit Order

    An order placed with a broker that combines the features of stop ...
  6. Bracketed Sell Order

    A sell order on a short sale that is accompanied (or "bracketed") ...
Hot Definitions
  1. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin account. In the context of the NYSE and FINRA, after an ...
  2. Salvage Value

    The estimated value that an asset will realize upon its sale at the end of its useful life. The value is used in accounting ...
  3. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  4. Promissory Note

    A financial instrument that contains a written promise by one party to pay another party a definite sum of money either on ...
  5. SEC Form 13F

    A filing with the Securities and Exchange Commission (SEC), also known as the Information Required of Institutional Investment ...
  6. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
Trading Center