Using orders to control your trading

It can be hard not to involve emotions when you’re watching a position make or lose money – and emotions make your trading harder to control.

You might snatch a profit and miss out on further movement in your favour, or close a losing position too early only to miss a market rally. Or worse – leave a losing position open too long in the hope of a rebound, but end up incurring even greater losses. Likewise, jumping into a trade on a surging market, with little or no research and no defined plan, isn’t a good idea.

Tempting as it can be to react in the heat of the moment, enforcing some discipline in your trading is important. You can then develop a consistent trading strategy that’ll help you achieve a positive risk-to-reward ratio – winning more when you’re right while losing less when you’re wrong.

Using stop and limit orders is a fairly simple way to lock in profits and guard against loss automatically. They offer a way to predefine where to open or close trades logically while avoiding emotional trading. Ultimately, they can help you achieve a risk-to-reward ratio that suits your trading strategy and goals.

You can set both stop and limit orders in the deal ticket of our trading platform. If you want to set a stop or limit to close a position, you’d do this from the ‘deal’ tab. On the inverse, you’d set a stop or limit order to open a trade using the ‘order’ tab.

Using orders

Before every trade, you need to consider how you’re going to control your profit and loss.

For instance, what risk-to-reward ratio do you want to achieve? A 1:2 ratio means you’re willing to lose £1 for each potential £2 gain on your position.

You should also think about the percentage of your trading capital you want to risk on each trade. Many stick to 1% of their total account equity per trade – we’ll look at why in the next lesson.

Once you’ve determined these, it’s easier to plan how you’re going to get in and out of the trade to ensure you stay in control of your profit and loss.

It might seem obvious, but one of the key ways to do this is to use entry and closing orders, which you can do using both stops and limits.

You set an entry order to automatically open a position if the market reaches a specific level – useful if you’re speculating on a market trend or support and resistance levels.

Closing orders on the other hand let you close trades automatically at your target price level.

This can be done to both lock in profits when a market moves in your favour, or cap losses if it moves against you.

You can add these to an entry order using the ‘stop’ and ‘limit’ fields in the ‘order’ tab as below. Or you can attach them to a trade you’re about to open in the ‘deal’ tab of the ticket:

Stop and limit orders

Stops let you pre-set your entry or exit point when a market’s price becomes less favourable than its current price.

If you want to close your position to cap your losses, you’d use a stop-loss order to automate your exit.

On a long position, you’d place this type of stop lower than the current market price, while on a short position you’d put it higher than the current market price. This is because you lose money on a long position if the market experiences a downturn, so you’re essentially closing your trade to control how much you lose.

The opposite is true for short positions – you place your stop above the current market price since a market rising translates to a loss on your position.

Inversely, you’d use a limit order to enter or exit the market when its price becomes more favourable than the current level.

Limits to close are sometimes called take-profit orders. To do this, you’d place your limit above the market price on a long position, and below the market price on a short position.

Working out whether you need a stop or limit can get confusing, especially when you’re going long on some positions and short on others. You can always refer to the matrix below to see all the possible options.

Here’s a quick example of how to interpret the first line (highlighted in the table):

If you’re setting a stop or limit to enter a trade in the ‘order’ tab, the type of order will display automatically in the deal ticket – so you won’t be in any doubt.

If you haven’t already placed stops or limits on your open positions, think about where you could add some to pre-plan your exit.

For instance, are there any positions which would put you at risk of losing more than 1% of your overall trading capital if the market moved suddenly against you?

You can add stops and limits to them in the ‘positions’ panel.