Using Stops and Limits to Capture Profits

In my last post, I showed you some important tips for proper equity managment. Since this topic was on my mind, I thought I'd give you some more tips about using stop and limit orders to capture profits and protect against losses.

If you place an order to sell below the market that is also called a stop order (also called a protective stop loss order because it protects you against more loss than you originally planned on).

If your original market order is to buy, then you stop loss order will be below the market, set there in case the market does not go up as you predicted.  If the market does not go your way, instead falling, you will be automatically taken out of the market once the market hits your stop loss order price.

Conversely, when you sell above the market or buy below the market your order is a limit order.

The reason is: if you place an order to sell above the market that means that your market order is a buy.  Your order to sell above the market is a limit order, also called a for-profit limit order or profit limit order.

You set a profit limit order to safeguard your profits if the market does go the way you predicted (in this case, your market order is a buy so you hope the market goes up).  If the market does go up, as you hoped, you want to make sure that you lock in your profits before the market turns around again.  Setting a sell order above your buy market order (setting a profit limit order) does just that.

If you place an order to buy below the market that means that your market order is a sell.  Your order to buy below the market is a limit order, also called a for-profit limit order or profit limit order.

You set a profit limit order to safeguard your profits if the market does go the way you predicted (in this case, your market order is a sell, so you hope the market goes down).  If the market does go down, as you hoped, you want to make sure that you lock in your profits before the market turns around again.

Setting a buy order below your sell market order (setting a profit limit order) does just that.

To summarize: if your market order is a sell, then your protective stop loss order will be to buy above the current market price, set there in case the market goes up instead of down (if you're selling you want the market to go down).

When you place a market order to sell, not only do you need to set your protective stop loss order to buy above the current market price (in case the trade does not go your way), but you also need to set a profit limit order to buy below the current market price, to safeguard your profits if the trade does go your way.  Every sell market order has a buy stop order above the market and a buy limit order below the market.

If your market order is a buy, then your protective stop loss order will be to sell below the current market price, set there in case the market goes down instead of up (if you are buying you want the market to go up).

When you place a market order to buy, not only do you need to set your protective stop loss order to sell below the current market price (in case the trade does not go your way), but you also need to set a profit limit order to sell above the current market price, to safeguard your profits if the trade does go your way.

Every buy market order has a sell stop order below the market and a sell limit order above the market.

Now that you're learning the basices about forex, you'll soon be ready to begin trading the forex (excited? you should be. Don't worry – you can start with as little as $25).

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