CONCEPT OF STOPS & LIMITS forex

Ok, here comes the fun part. Before I explain the other order types (i.e. OCO, If-Then, etc…) you need to grasp the concepts of “Stops & Limits”. Whenever you make a trade you will always be doing these three things. Let’s pretend you’ve gone “long” on a trade (you bought going up) then sooner or later you must exit that trade, and to exit a position that you’ve bought then obviously you need to sell your position. When you “sell” to exit your trade then you’ll either sell it for a profit or for a loss. As by now you should already understand, if you were to set an order to sell at a higher price for profit then you would accomplish this by setting a “limit order”. If you were to set an order to sell at a lower price for a loss then you would accomplish this by setting a “stop order”. All this should be obvious to you as well for the opposite direction if you were to go “short” on a trade (you sold going down). Sooner or later you must exit that trade, and to exit a position that you’ve sold (shorted) then obviously you need to buy your position. When you “buy” to exit your trade then you’ll either buy it for a profit or for a loss. If you were to set an order to buy at a lower price for profit then you would accomplish this by setting a “limit order”. If you were to set an order to buy at a higher price for a loss then you would accomplish this by setting a “stop order”. Here is a diagram to show you this visually.

So if you are already in a trade, either long or short (for example by doing a market order) then you will need to place at the very least a stop order (to protect you from unlimited loss) and possibly a limit order (to automatically exit at a predetermined profit). You can accomplish either individually or better yet by doing an “OCO” order (explained later). It is important to understand that you CAN NOT place a Sell-Stop order or a Buy-Limit order above the current market price, nor can you place a SellLimit order or a Buy-Stop order below the current market price. If you attempt to do so then your broker will return an error and the order won’t be entered. The correct order needs to be placed on the correct side. If you understand what I just said then congratulations for you (you’re a Mensa candidate), but if you are confused then just reread the above a few times until it sinks in.