The forex market is significantly more volatile than the stock market because of its sheer size and use of leverage. According to the Bank for International Settlements, the turnover volume in the global foreign exchange market is 30 times greater than the daily global gross domestic product. This, coupled with the increased geopolitical tensions and macroeconomic headwinds, has resulted in heightened volatility in the currency market.
Several tools such as buy limit orders and stop-loss orders can help traders limit their risk exposure and minimize losses in case of an adverse market movement. Take a closer look at how the buy limit works in foreign exchange trading.
How Does a Buy Limit Order Work?
A buy limit order allows traders to purchase a currency pair below a predetermined price. When a currency exchange rate falls under a preset price, a buy limit order is automatically triggered, ensuring that traders can acquire a forex pair at or below the predetermined price. Buy limit orders are ideal when an investor expects a currency pair value to fall in the near term.
Setting a Buy Limit Price
Traders who expect the forex exchange rate of a particular currency to fall can set a buy limit order to capitalize on the expected market movement. For instance, a trader who expects the USD/EUR exchange rate to plummet in the upcoming trading sessions can set a buy limit order at the expected price, which will automatically be triggered when the exchange rate falls to that level or lower. The USD/EUR rate at the time of writing was 0.91. If traders anticipate the price to fall soon, they can set a buy limit order at 0.85 or lower.
Triggering of Buy Limit Order
The moment the USD/EUR exchange rate hits 0.85, the buy limit order will be triggered immediately. This ensures the order to buy the U.S. dollar-euro currency pair at 0.85 or lower. Traders should note that a buy limit order is executed on a first-come-first-served basis.
Why is it Important to Understand Buy Limit in Forex
The forex market is immensely receptive to changes in the international markets, such as official government data releases and geopolitical events. News pertaining to macroeconomic data or reflecting government relations between two economies can lead to a massive fluctuation in the respective currency pair exchange rate. Also, as the majority of forex trades are highly leveraged, even a fractional change in the market price can result in substantial losses or gains. Understanding and incorporating buy limit orders while trading can be remarkably beneficial for currency traders.
Advantages of Buy Limit Orders
A buy limit order allows traders to purchase currency pairs at a predetermined price or lower, reducing their initial investment costs. Because a limit order is automatically executed, a trader does not have to worry about missing the correct investment window or monitor the exchange rates 24/7. Because buy limit orders are only triggered at the preset price, traders can reduce losses resulting from leading and lagging.
Disadvantages of Buy Limit Orders
A limit order also comes with certain disadvantages — primarily the loss incurred if a trader fails to predict the market trend movement or miscalculates the buy limit price. As forex markets are tremendously volatile, any minor development can trigger a trend reversal, resulting in a missed opportunity for traders.
When to Use a Buy Limit Order in Forex?
If you are certain that a currency exchange rate will fall soon, a buy limit order might be for you. Traders can place buy limit orders at any price below the current rate, assuring order execution if the forex pair has a bearish trend.
Tips for Placing an Effective Buy Limit Order
Use caution when implementing a buy limit order. These market orders would maximize profit if a currency pair depreciates in value in the near term before regaining momentum, allowing a forex trader to generate profits through the buy-low-sell-high investment strategy. But traders should conduct proper research and not succumb to market noise or fear of missing out while placing buy limit orders as they can lead to enormous losses or otherwise missed investment opportunities. Calculating the buy limit trigger price accurately is also crucial. Traders can analyze past market trends and analyst predictions while calculating the limit order price.
Using Buy Limit Orders to Maximize Profits
While buy limit order is a valuable tool at every forex trader’s disposal, using this type of market order alone might not be prudent. Similar limit orders such as buy stop limit orders and sell limit orders can help traders reduce their risk exposure as well as reduce the need to monitor the currency market throughout the day to seize the exact market opportunity.
Frequently Asked Questions
What does a buy limit do?
A buy limit order allows traders to buy a currency pair at a predetermined price level or lower.
Which is better: buy stop or buy limit?
While buy limits are only executed if an asset price hits a particular point or lower, a buy stop order is executed at a preset range. Both are useful tools if a trader anticipates a dip in the market exchange rate.
What is an example of a buy stop limit?
A buy stop limit order entails price levels at which a trader is willing to purchase a forex pair. For instance, if a trader anticipates the USD/EUR rate to rise temporarily, they might set a buy limit price at 0.95, and a stop limit price of 0.93. If the currency pair hits the buy limit price, then a buy order is automatically triggered at the stop limit price.
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