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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).

Posted in Forex Basics

Forex Order Equity Management Tips

To help you completely understand the Forex game, I’ve been blogging about some of the forex basics.  Before you can start surfing the forex, you need a thorough understanding of proper equity management principles.

Staying in the Game: Practicing Sound Equity Management

It is important before you begin trading to learn how to manage your equity.

A large part of sound equity management is managing your risk.

The most important way to manage your risk is to set a profit limit order and a protective stop loss order for each trade you place.  Your trading software will most likely not require you to set a protective stop loss order and a profit limit order each time you enter the market, but doing so is crucial to consistent successful trading.

For each market order you set you will need one stop order and one limit order.

That means that every entry will have two exits.

If you you enter a long position (you buy) and you set one exit point higher than the entry price (that is your for profit limit order where you will sell if the prices reach that point) and the other exit point you set lower than the entry price (that is your stop loss order where you will sell if the prices reach that point).

This way, you minimize losses if you were wrong about the trade, and safeguard gains if you were right.

If you enter a short position (you sell) and you set one exit point above the entry price (that is your stop loss order where you will buy if the price reaches that point) and the other exit point you set lower than the entry price (that is your for profit limit order where you will sell if prices get to that point).

By setting to exit points for every entry you will minimize losses if you were wrong about the trade and safeguard gains if you were right.

When you buy above the market or sell below the market your order is a stop order.

The reason is this: if you place an order to buy above the market that means that your market order is a sell.  Your order to buy above the market is a stop order, which you set to minimize your losses should the market not go down, as you bet it would.

Setting a buy order above the market (a protective stop loss order) means that in each trade you make you will know in advance how much money you could potentially lose – because you do not have to place a market order to buy if the trade is going badly; that order is automatically filled when the market reaches that higher prices, it stops you out there.

In my next blog post, I’m going to talk more about market orders. Keep reading and you’ll soon understand the basic rules of the forex market enough to start trading like a super successful rock-star (we’ll get it it, stay tuned )

Posted in Forex Basics

Basic Rules of the Forex Market

The Forex market has basic rules that it operates by. In this post, I’m going to review a few important things for you to know about how the Forex market works.

While you are actually speculating – betting – on others who are actively trading a currency, you will still hear yourself referred to as a trader, and you will still hear your market actions referred to as trades.

If you are betting on the value of the U.S. dollar in relation to the value of the Euro, you are said to be trading the USD against the EUR. That trade would appear like this in your software package: USD/EUR.

You may also refer to a currency combination as a cross (in this case, the U.S. dollar/Euro dollar cross). There are seven currencies that are most actively traded in the Forex market. They are: the U.S. dollar (USD), the Euro dollar (EUR), the Canadian dollar (CAD), the Australian dollar (AUD), the Swiss franc (CHF), the British pound (GBP), and the Japanese yen (JPY).

Trading Times

In the United States, the Forex market opens at 7:00PM EST on Sunday evening and closes on Friday evening at 4:00PM EST. Between those days, the Forex market is open 24 hours a day, because the Forex is traded around the globe.

There are three trading sessions in each 24-hour period: The Asian session opens at 7:00PM EST and closes at 6:00AM EST. The European session opens at 2:00AM EST and closes at 11:00AM EST. The North American session opens at 8:00AM and closes at 5:00PM EST (except on Friday, when trading closes at 4:00PM EST).

When trading the Forex, there are three types of orders

1. Market Orders - A market order is an order to enter/exit (buy/sell) at the market price (that is, at whatever the market price is at the time of execution). This type of order can incur slippage.

2. Limit Orders - A limit order is an order placed to enter or exit the market at the exact price placed (or better) with no slippage.

3. Stop Orders - A stop order is an order to enter/exit the market at an exact price. The stop order turns into a market order when reached and can therefore incur slippage.

I’ll be blogging about more Forex basics for the next few blog posts so you can get the background you need in order to understand the Forex market and become an active trader.

Posted in Forex Basics