New traders often confuse limit orders with stop orders because both specify a price.
Both types of orders allow traders to tell their brokers at what price they’re willing to trade in the future.
The difference lies in the purpose of the specified price.
A stop order activates an order when the market price reaches or passes a specified stop price.
For example, EUR/USD is trading at 1.1000, you have a stop entry order to buy at 1.1010. Once the price reaches 1.1010, your order will be executed.
But it doesn’t necessarily mean that your buy order was filled at 1.1010. If the market was moving fast, you might’ve been filled at 1.1011.
Basically, your order can get filled at the stop price, worse than the stop price, or even better than the stop price. It all depends on how much price is fluctuating when the market price reaches the stop price.
Think of a stop price simply as a threshold for your order to execute. At what exact price that your order will be filled at depends on market conditions.
A limit order can only be executed at a price equal to or better than a specified limit price.
For example, EUR/USD is trading at 1.1000, you have a limit entry order to buy at 1.1009. Your order will not be filled unless you can get filled at 1.1009 or better.
Think of a limit price as a price guarantee. By setting a limit order, you are guaranteed that your order only gets executed at your limit price (or better).
The catch is that the market price may never reach your limit price so your order never executes.
In the previous example, EUR/USD may only fall down to 1.1009 before skyrocketing.
So even though you wanted to go long EUR/USD, your order was never executed since you were trying to enter a long position at a cheaper price.
You watch EUR/USD rise without you.
This is the tradeoff when using a limit order instead of a market order.
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