Using limits

Limits are useful for controlling how much you pay or make on a trade, and when used properly – often in combination with stops, to enforce a particular risk-reward ratio – they are a very useful tool for achieving trading success.

Using a limit-close

A limit-close order lets you specify the level at which you want an open trade to be closed, to secure your desired profit. If you’re long a market then this would be above the current market level, and if you have a short position open, it will be at a lower level.

You can set limit-close orders in the ‘deal’ tab of the deal ticket. Let’s take a look at an example.

Setting a limit-close order gives you greater control over the profit you’re taking – helping you resist the temptation to snatch a profit too early and instead increasing your chances of meeting your profit targets. You can use them to manage the ‘reward’ part of your desired risk-to-reward ratio. We’ll look at using limits together with stops in more detail shortly.

Using a limit-entry

A limit-entry order enables you to enter a trade automatically at a more favourable price than current. You’d use this if, for instance, you were bullish on a market but thought it was currently overpriced, or if you were bearish but thought the market underpriced. In other words, this order is useful when you believe there will be a short-term adverse move in a market before it reverts to the direction you want.

If you’re buying, your limit-entry will be lower than the current market price, and if you’re selling it would be above.

You can place limit-entry orders in the ‘orders’ tab of the deal ticket. As with stop-entries, you’ll know when you place a limit-entry – the execution button will update automatically with the order type.

So, you might use a limit order to open if your analysis indicates that a market will drop before rebounding (if you want to go long) or rise before dropping (if you were to go short on the market), and you know you want to open a trade at that sweet spot of support or resistance before the change in direction.

Things to consider

Like stops, both limit-entry and limit-close orders are subject to slippage if the market gaps through the order you’ve set. This can result in positive slippage – where your limit is executed at a more favourable level than you were expecting. In times of market volatility this means your position could actually be opened or closed at a better price than you set.

On the flipside, there’s also a possibility that your order won’t ever be executed if the market never reaches your order level, as it would never be triggered.

When you use a limit to open, you’re placing an order against the current market trend – which is a risk. The market is probably more likely to move against you in the shorter term, so you might find that your order is triggered only for your position to immediately go into loss. So, if you were long on a position and the market fell instead of rebounding, or if you were short and the market kept rising.

Using limits with stops to enforce your risk-reward ratio

Using stops and limits together can guarantee a balanced risk-to-reward ratio.

If you wanted to trade with a 1:2 risk-to-reward ratio, you would place your limit order twice as far away from the opening price as you place your stop order. This would ensure that you stand to lose half as much if your stop was triggered as you would gain if your limit was triggered.

It’s easy to see your risk-to-reward ratio by position in the platform, as well as your stop and limit levels and the amount of money you’ll win or lose if they’re triggered. Just click on your position in the ‘positions’ tab, and take a look at its chart.

To change your stop or limit, just drag them to where you need them to be. Your risk-reward ratio will update automatically. You can set stops or limits on an open position like this, too.