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Foreign Currency Trading Basics
By admin | July 26, 2010
If you go through any Fx trading guide (See Bird Watching in Lion Country guide) you might come across the terms stop/loss and limit order. What are these terms and how they help you to earn money with trading?
There are two types of conditional order that you can opt when dealing with Fx. They are the stop/loss and the limit order. We call these conditional orders since they will not activate unless certain conditions are met.
The stop/loss is a familiar order that checks the risk involved in a trade. Using a stop/loss, you are giving instructions to the foreign exchange broker, “If I encounter loss over certain limit, I want out.” So if you have purchased a currency pair anticipating a hike in price, but unfortunately the price goes against you, your total balance in account will not be vanished.
On the other hand a limit works reverse condition, the condition where you have a booming trade. In case of a limit order, you are telling the foreign exchange broker, to close the trade when certain level of profit is achived. Once set, the limit order will be triggered if your set price is attained and the trade will be closed at this price.
Most of the fresh Fx traders are unwilling to use limit orders when they first start. In their point of view limit order looks counter intuitive. After all if the market is getting your way, why would you need to close the trade? Wouldn’t you want to hold on as long as possible to get the most profit out of it? The problem with this approach is that sooner or later the price will turnaround, and oftentimes this happens sooner rather than later. If you do not have a limit order in place, how do you recognize when it has gone too far? If you hold too long, a sharp reversal could see all of your wins wiped out.
So unless you have a system which is put together with precise numbers to inform you when it is time to close a trade, you will probably be better off with the help of limit orders.
Practicing limit orders has another worthy benefit too. Once you set the stop/loss and limit order in your account, you can relax and don’t have to closely watch the trade. Though you will not enjoy the kind of freedom that you can attain through automatic Fx trading robots, with limit order and stop/loss in position there is no need to see each minute variation of price while trading. This dilutes stress and makes it less likely that you might panic and move away from your original plan. So employing limit orders in forex trades creates a better, rich trader.
Now that you discovered about the benefits of limit orders you might be thinking of applying it on your account. Keep in mind that you have to test starting on demo Fx account and acquire a feel of it before you trade on a real account.
For total auto Fx trading my suggestion is to get a good forex robot like Forex Black Panther EA.
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