Are There Rules in Using Stop Orders and Limit Orders?

Leverage can offer both advantages and disadvantages in CFD trading. It can cause you to have big gains but also huge losses as well. Because of this, traders must be wise enough to deal with the risks and an effective trading strategy must be strongly employed. These risk management strategies include stop and limit orders. In the CFD market, stop and limit orders are somehow being used the same way as with the stock market.

For limit orders, the trader is allowed to set either a minimum or maximum price where they can buy or sell. For stop orders, it permits the trader to have a specific price where they can buy or sell an asset.

No Set Of Rules Are Required

There is no such thing as rules that specify how stop orders and limit orders must be used when managing a position in trading. It would be the personal decision of the trader as to where they should put these orders depending on their risk tolerance. There are investors who think that they are willing to take on 30- or 40-pip loss while others are risk-averse and think that they should just limit their losses to 10-pip.

Even though there are no regulations as to where the investor must place their stop and limit orders, traders must remember not to be too strict when it comes to their price limitations. In cases where the price of the order becomes too tight, it will be automatically filled because of the market volatility. Stop orders must be employed in places where the market prices get to rebound easily, in a much profitable direction as it provides protection against excessive losses. Furthermore, limit orders or take-profit orders must never be placed somewhere far from the current trading price that might cause an unrealistic move with regards to the price of the currency pair.

Stop Order

This type of order becomes a market order when a particular price is reached. Stop order can be utilized to enter a new trading position and also exist a current position. Meanwhile, a buy-stop order is a set of instructions to purchase a currency pair at a market price only if the market reaches a particular price. A buy price has to be higher than the market price. A sell stop order, on the other hand, is a set of instructions that specifies the sell of the currency pair once the market price reaches a specified price or much lower. This price has to be lower than the current market price.

Limit Order

This type of order is placed when entering a new position or exiting your current position. Limit orders can only be filled once the market trades within a specific price or even better. A limit buy order is a set of instructions to purchase a currency pair when the market price reaches a particularly lower price. Always remember to consider your risk appetite when employing stop order or limit order because the ability to manage the risks in CFD trading differs from one trader to another.