There are two sorts of conditional order that you can place with currency exchange trades : the stop loss ( sometimes written stop / loss ) and the limit order. We call these conditional orders because they will not come into effect unless specific conditions are met.

The stop loss is a well-known order that controls the chance concerned in a trade. With a stop loss, you are saying to the broker, “If the price goes this far against me, I want out. ” So if you have purchased a currency pair hoping for an increase in price, but then the price falls, you will not see your whole account balance wiped out.

A limit order is comparable but applies to the opposite situation, the situation where you have a winning trade. With a limit order, you say to the broker, “If the price reaches this level, that is’s enough, I’ll close there and take it. ” The limit order will be caused if your pre organized price is reached and the trade will be closed at that cost. It seems counter intuitive. If you do not place a limit order, when will you close the trade? How will you know when it has gone as far as it is going? If you wait too long, a unexpected reversal could see all your profits wiped out.

So unless you have a system that is set up with terribly precise factors to tell you when to close a trade, you will possibly be better off if you use limit orders. Where do you set them? Back testing your system can be helpful here. Remember of course that past results aren’t necessarily going to be repeated in the future.

In most cases you’ll want the limit order to be farther from your place to begin than your stop loss, even after spread is taken into account. This will mean that you only have to score a 50% success rate to be in profit. Setting the limit order at two times the pips of the stop loss, either before or after spread, could be acceptable. Don’t skip the testing.

Using limit orders has another valuable benefit too. Once you have both stop loss and limit order in place , you can run away from the computer and get on with your day. There’s no need to observe each little fluctuation of price until one or the second is caused. So using limit orders in currency exchange trades makes for a happier, more profit-making trader.