What is a Limit Order?
In forex trading, limit orders are instructions to buy or sell currency at a specific exchange rate within a set time frame, (which may be hours, days, weeks, or months), and at a rate that is better than the current market price. If your target rate is reached, the trade occurs automatically.
Limit orders are a waiting game. They will not execute until the specified rate is achieved. This means they are ideal for businesses and investors who are not in a rush to buy or sell, and who wish to set their target rate and let the trading platform do the rest.
How Do Limit Orders Work?
Limit orders let you set a target exchange rate that is better than the current market price, effectively placing a pre-order for your chosen currency if and when it trades at the rate you want. The trade will automatically execute when your target rate is reached. Limit orders can be very useful if you want to buy or sell foreign currency at some point in the future, but your timeline is flexible. A limit order may let you achieve a better exchange rate than the one currently available and they can be an astute move for businesses that deal in foreign currencies.
Example of a Limit Order
George wants to trade GBP to buy US Dollars within the next 30 days. The current rate is 1:1.11, but he only wants to buy if the rate reaches 1.13. He sets a Limit Order for this price and lets the trading platform do the rest. 15 days later, the rate reaches 1:1.13 and the limit order executes. A limit order executes as soon as it reaches the desired rate at any time of the day or night, so no need to monitor the markets.
What Are the Benefits of a Limit Order?
- Buy or sell at a rate you specify and that is better than the current market price.
- Set it and forget it – no need to monitor the forex markets.
What Are the Disadvantages of a Limit Order?
- Your target rate may never be achieved, so your trade will not occur.
- Your Limit Order will execute as soon as your target rate is reached. You may miss out on more favourable prices that come shortly afterwards.
No Rush May Bring Richer Rewards
Often, it appears as though everything we do in this world must be ‘done yesterday’. However, for investors and businesses who are prepared to wait, the rewards may be richer. Limit orders take the strain and the hurry out of forex trading. Just set your target rate, wait for the market to move where you want it to, then automatically buy or sell at the price you want.
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