In the above example we assumed you already had an active trade, and we just
looked at how to exit that trade with either a stop or limit order. You might
have entered that trade, for example, by simply doing a market order. But
what if you want to do an “Entry Order” (the broker will automatically enter
you into a trade once the market hits your predetermined price)? If you’ve
played with FXCM’s trading platform then you know that they let you do so
very easily, however with other brokers you need to do a little mental
gymnastics.
I’ve decided (after thinking about whether to do it or not) to not explain to you
the reasoning behind why what I’m about to tell you is the way it is, as I think
that it might only confuse you (at first). All that is important to understand is
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the HOW (not the why). Once you grasp the “how” later you’ll figure out the
“why”.
There are four (4) variations for placing an “Entry” order that you need to
know, and here they are:
1. If you want to enter to Buy (go long) once the market hits a
predetermined price that is ABOVE the current market price then you
do so with a “Buy-Stop” order. (used if you believe that if the market
moves up to that price that it’ll continue in that direction – example
used: “Surfing” a wave top; pattern breakout)
2. If you want to enter to Buy (go long) once the market hits a
predetermined price that is BELOW the current market price then you
do so with a “Buy-Limit” order. (used if you believe that if the market
moves down to that price that it’ll bounce back up – example uses:
within-range trading; buying at the 62% Fibonacci retracement)
3. If you want to enter to Sell (go short) once the market hits a
predetermined price that is BELOW the current market price then you
do so with a “Sell-Stop” order. (used if you believe that if the market
moves down to that price that it’ll continue in that direction – example
used: “Surfing” a wave bottom; pattern breakout)
4. If you want to enter to Sell (go short) once the market hits a
predetermined price that is ABOVE the current market price then you
do so with a “Sell-Limit” order. (used if you believe that if the market
moves up to that price that it’ll bounce back down – example uses:
within-range trading; buying at the 62% Fibonacci retracement)
Here is a diagram to help you understand this visually:
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The above can be used to place either a “Stop Order” or a “Limit Order”, but
realize that once it is activated that you don’t have either a Stop set for loss, or
a Limit set for profit (which you should have at least a stop set). What you
have to realize is that though the words “Stop” and “Limit” are used to define
those order types for entry you MUST understand that you shouldn’t confuse
them with being a “Stop” for loss or a “Limit” for profit. The fact that those
words are used to define two different concepts is what leads many people to
confusion, so be sure to get these ideas straight in your mind.
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