How to Use Limit Orders

An Introduction to Limit Orders

You can utilize a limit order either to close or open your spread bets at a preferred value which is different from the present price offered. This lesson is intended to illustrate the proper usage of limit orders:

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Limit orders are exceptionally useful for enabling you to state the precise price at which you want your spread bet to be implemented.

For example, envisage that you are keen to open a long spread bet based on the EUR/USD but price has so far not risen higher enough to activate your entry criteria. However, you could now activate a limit order so that your bet would be immediately executed as soon as your defined conditions are met. This useful order type therefore provides you with the ability to secure profits but without monitoring the markets continuously.

Essentially, you can activate limit orders to open and close spread bets without constantly staring at your computer screen all day long. If price never hits your specified entry levels, then your bets will not be enforced. The most popular usage of a limit order is to close spread bets early in order to lock-in profits.

How to Close a Spread Bet using a Limited Order

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 The diagram above demonstrates that a trader decided to open a long spread bet, based on a particular asset at the displayed green line after price had been decisively rejected by a major support level (brown line). As a key resistance level was also detected at the level above denoted by the pink line, the trader opted to close the bet in profit if price rallies and hits that level. This objective was achieved by the trader executing a limit order with the intent of terminating the bet at the resistance level, displayed by the dark blue line. The major reason for implementing such a limit order was to close the bet in profit if price reached the predefined value.

How to open a Spread Bet using a Limited Order

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The above diagram presents an example of a limit order that was devised to activate a spread bet if favorable conditions were realized. Imagine that a trader has detected a major support level for a specific asset and has deduced that if price should drop to that level, it will then most likely bounce by rallying upwards. The trader therefore implements a limit order to execute a long spread bet at the support level so that if price does plunge to that point his trade would be then automatically activated.

Limit orders are just as effective for short trades as for long ones. However, a limit order to exit a short spread bet will usually identify a price level that is lower than the current value. A limit order to enter a short spread bet normally specifies a price level that is higher than the current value.

Practical Examples of Limit Orders

Simple limit orders enable you to place orders with your spread betting broker to initiate a bet if price attains a specified value. One of the key advantages of using limit orders is that once they are set you do not any longer have to constantly monitor the financial markets.

For example, envisage that you are about to take a holiday during a period when some interesting trades could evolve. As such, although you would like to monitor the markets, you will not be able to do so. The quarterly spread quoted for the September EUR/USD is 1.3300/1.3400 but you have deduced that it could well decline over the next couple of days before rallying sharply. Consequently, you would definitely not purchase a bet at 1.3400 if you can open a long spread bet at 1.3250 in a few days from now.

As such, you place the following limit order with your spread betting broker: ‘Buy September EUR/USD at a limit of 1.3250’. Your broker will then activate a long spread bet based on the EUR/USD if price does plunge to hit 1.3250. No further instructions are required from you to activate this trade.

Here is an example of shorting a spread bet using a limit order. Your analysis has deduced that the EUR/USD will rise over the course of the next few days before plummeting sharply. Your broker is quoting the same spread as in the last example. Again you do not want to sell the EUR/USD at 1.3300 if you could open such a short bet at 1.3450 a few days later. As such, you send the following limit order to your broker: ‘Sell September EUR/USD at 1.3450’. If price does rally and hits 1.3450, then your short bet, structured on the EUR/USD, will be automatically opened without any further intervention from you.

Constructing Strategies on the Limit Order

One of the main advantages of limit orders is that they can help you eliminate emotions from your spread betting activities. When you are trading, you can easily take your profits prematurely while allowing your losses to grow into monsters. Placing limit orders in advance instead of executing bets immediately can help you resolve such problems. Many traders utilize the risk-to-reward ratio in order to implement a strategy based on the limit order proficiently. For example, consider that you are aiming to achieve a risk-to-reward ratio of 1:3. You could then set limit orders to take profits if 30 points is achieved while limiting losses if price drops 10 points against your positions.

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