Using Limit Orders to Increase your Forex Profits

It would be great if we were all able to sit next to our computer screens for 24 hours per day, watching the market and ensuring that all of our trades were profitable ones. Unfortunately, we all have to sleep however, so no matter how hard we try, there will always be a period where we are unable to keep track of action on the market.

Just like we have stop loss orders which are able to cancel out loss making position before those losses have a chance to grow, there are also things which fulfil the opposite objective.

That is – if you have already made a profit on a trade, something called a limit order is able to close out the trade for a profit when it reaches a particular level. Therefore, if you are sitting on a healthy profit, you can protect that profit automatically, without having to spend every waking moment at the screen.

Let's take a closer look at how this works.

How Do Limit Orders Work?

Basically, limit orders work in exactly the same way that stop loss orders work. That is – they are placed in advance so that the computer system can execute the trade of and when the currency pair you are trading hits a particular level. As we did with stop loss orders, let's take the time to go through an example of where limit orders might be useful.

• You enter a long (buy) trade on the USD/JPY currency pair at 85.00
• The currency pair moves up to 86.00 and you are sitting on a 100 pip profit
• You don't want to lose this profit, so you set your limit order at 85.80

Here – you have placed a protective limit order. There are actually two different types of orders. The first is an order which is above the current market price (for a long trade) – in the hope that the market will eventually reach that level.

This is called a target limit order, and it is solely designed for taking profits at particular stages of the trading cycle where you have specific targets in place.

The other limit order type is the one we placed in our example – which is referred to as a protective limit order. This is designed to protect capital and allow you to conserve your account capital by locking in an existing profit.

Which Type of Limit Order is Best?

Ultimately, it depends on your trading style to choose which limit order is best. They are both extremely useful when it comes to trading both quiet and volatile currency pairs, so you should be able to utilize them in almost any trading strategy that you could conceivably come up with.