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Basic Questions about Limit Orders

  • #1
  • First Post: Jul 2, 2005 4:41pm Jul 2, 2005 4:41pm
Can somebody explain to me what "Entry Stop Sell" and "Entry Limit Buy" are? I understand the basic principle of a limit order is to specify a price at which one will enter a position either long or short. But, I don't understand why there are two kinds of limit orders. Does it have to do with the direction in which the price approaches the limit price? i.e. is an entry limit exicuted when a price goes UP to a certain price, and a entry stop exicuted when a price goes DOWN to a certain price? I'm highly confused.
  • #2
  • Jul 2, 2005 5:26pm Jul 2, 2005 5:26pm
thinking back to when i was a beginner i remember this being such a hard concpet to grasp. maybe this will help...

a limit entry order can be one of two things:
1. a buy order below the current price
2. a sell order above the current price.

a stop entry order can also be one of two things:
1. a buy order above the current price
2. a sell order below the current price.

so in total you have four ways to enter any market.

you can think of a limit order as a counter-trend order. it waits for the price to go up and then sells, or waits for the price to go down and then buys. a stop order is the opposite of course. it waits for the price to go up, then buys, or waits the price to go down, then sells.

sorry if ive confused you even more
Relax and be happy.
  • #3
  • Jul 2, 2005 10:28pm Jul 2, 2005 10:28pm
Thank you very much for clearing that up Merlin. It seemed logical to me that there would be four ways to enter the market when you combine buy or sell with limit or stop. I just couldn't figure out which combination meant what. And suprisingly, I couldn't find a clear explanation of "Entry Limit Buy" or "Entry Sell Stop" on the web. But, like I said, you cleared things nicely, so I'll no longer have a problem with it.
  • #4
  • Jul 3, 2005 6:28am Jul 3, 2005 6:28am
I know that Merlin did explain this, but I also remember when I was a beginner 4 years ago and I spent around 2 years confused with the types of orders. So excuse me, I will explain it my way, if you don't mind Merlin

When you are out of the market, i.e. having no position and looking to enter the market, this is how the limit and stop works:

- A Limit Order allows you to enter the market at a better price than the one quoted now.

- A Stop Order allows you to enter the market at a worse price than the one quoted now.


The same concept applies when you are in the market, i.e. having a position and looking to exit the market. Nothing changes, Limit and Stop orders work the same way either you are out of the market or in the market.

Apply this for both long and short attempts to enter or exit the market and you will see that they are pretty simple.
  • #5
  • Jul 3, 2005 3:49pm Jul 3, 2005 3:49pm
Quoting narafa
- A Limit Order allows you to enter the market at a better price than the one quoted now.

- A Stop Order allows you to enter the market at a worse price than the one quoted now.
thats the most simple way i have ever heard this explained. nice narafa!
Relax and be happy.
  • #6
  • Jul 3, 2005 7:36pm Jul 3, 2005 7:36pm
Thanks Merlin

Hope that I have been helpful.
  • #7
  • Jul 4, 2005 3:22pm Jul 4, 2005 3:22pm
While your explanation was certainly clear Merlin, I have to say that Narafa's explanation is a bit easier to remember. In any case, I'm glad to hear I'm not the only person who's had difficulties with the terminology.
  • #8
  • Jul 9, 2005 5:54pm Jul 9, 2005 5:54pm
Why not just have Buy and Sell?

If you want to Buy USD/JPY at 112.00 and its at 111.90.

Why can't it just be a Buy at 112.00.

Currently if you want to Buy or Sell at a certain price depending on where the price is when you place the order only one type can be chosen anyway.

The only reason I can think of for the current standard is make it a little more complicated so people have to think a little so they don't make any mistakes.

Does my thinking make sense or am I way off base?
  • #9
  • Jul 10, 2005 7:22am Jul 10, 2005 7:22am
I had the same question myself. Originally I thought that a Limit buy differed from a Stop sell by the direction from which the price approached the limit order. For example, a Stop sell at 110.12 would only work if the price came DOWN to 110.12 (i.e. 110.14, 110.13, 110.10) and a Limit Sell at 110.12 would only work if the price came UP to 110.12 (110.10, 110.11, 110.12), regardless of where the price is at the moment. That may not be clear so let me clarify. If you were to place a Stope Sell above the current price, the price must first go ABOVE your order and then come back down to it to activate it. I think that that would be a useful feature, since it would garuntee that the price was moving in your direction when your order was placed. BUT, since none of what I just said is actually the case, I suppose it's best to just memorize the terminology like everone else.
  • #10
  • Jul 11, 2005 5:34pm Jul 11, 2005 5:34pm
Quoting nutmg12
Does my thinking make sense or am I way off base?
it makes perfect sense. the computer should figure out if you are doing a limit or stop order.

but as you mentioned, the stop or limit designation does put an extra check on the order so that you are less likely to make a mistake. but there are less confusing ways to ensure a mistake is not being made, so i dont think thats why the limit/stop designation was invented.

does anyone know the history of why we use limit and stop orders?
Relax and be happy.
  • #11
  • Sep 23, 2007 11:43am Sep 23, 2007 11:43am
What is the different between buy limit order and buy stop order? I read somewhere that if you placed a buy limit order, it could be filled immediately by your platform eventhough price has not reached the specified target?
  • #12
  • Sep 23, 2007 1:49pm Sep 23, 2007 1:49pm
Quoting mattlorig
While your explanation was certainly clear Merlin, I have to say that Narafa's explanation is a bit easier to remember. In any case, I'm glad to hear I'm not the only person who's had difficulties with the terminology.
it seems that most traders, including me, had problem with learning limit/stop orders. I also remember when i started reading about trading, i was lost in call and putt :
"Abandon all hope, you who enter here" La Divina Commedia, Dante Alighieri
  • #13
  • Sep 23, 2007 1:55pm Sep 23, 2007 1:55pm
Quoting arhemsi
What is the different between buy limit order and buy stop order? I read somewhere that if you placed a buy limit order, it could be filled immediately by your platform eventhough price has not reached the specified target?
The limit order is a request to action the order at that price or better. So with a limit buy you place it at point below where price is now and heading down to an area you've designated as one where price would revert to an upward trend. The limit order is designed to get you into the trade at that price or better.

A Buy Stop order is placed above the point that price is at now, in anticipation of price reaching that point and continuing up. The main difference is that a stop order, when hit, becomes a market order and faces the same fight for a price that every market order does. So this is why a market order can sometimes not get filled at the price you pressed the order button at.

(Merlin will correct me if I've not explained that adequately )
  • #14
  • Sep 24, 2007 4:52am Sep 24, 2007 4:52am
Inserted Code
The limit order is a request to action the order at that price or better. So with a limit buy you place it at point below where price is now and heading down to an area you've designated as one where price would revert to an upward trend. The limit order is designed to get you into the trade at that price or better.

A Buy Stop order is placed above the point that price is at now, in anticipation of price reaching that point and continuing up. The main difference is that a stop order, when hit, becomes a market order and faces the same fight for a price that every market order does. So this is why a market order can sometimes not get filled at the price you pressed the order button at.

How wrong did I get that one. No wonder, I was immediately filled when I opened a buy limit order when the specified price was above the current price. Lol

Thank you PeterFM. And then I realised Merlin has posted an equally effective explanation earlier.

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  • #15
  • Sep 24, 2007 9:12am Sep 24, 2007 9:12am
Quoting arhemsi
How wrong did I get that one. No wonder, I was immediately filled when I opened a buy limit order when the specified price was above the current price. Lol

Thank you PeterFM. And then I realised Merlin has posted an equally effective explanation earlier.

ForexFactory is the best place to learn forex.
When I first read this thread I was confused as to why there was a problem with Limit and Stop Orders. My brokers trading platform won't allow me to place a BuyLimit above the current price or a SellLimit below the current price. Evidently, some brokers don't see this as a problem.

BTW I agree, Forex Factory is the best place to learn Forex.
  • #16
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