Introduction
In the dynamic world of financial markets, traders utilize various order types to manage their positions and control risks. Among these, limit and stop orders play a crucial role in automating trade execution based on predetermined conditions. One key aspect to consider when implementing these orders is the minimum limit/ stop distance, which varies across different asset classes. In this article, we will explore the minimum limit/ stop distances for Forex, Indices, and Gold/ Commodities.
Setting Minimum Limit/ Stop Distances:
1. Forex: 1 pip
In the Forex (foreign exchange) market, where currencies are traded against each other, the minimum limit/ stop distance is typically measured in pips. A pip, short for "percentage in point" or "price interest point," is a standard unit of movement in the exchange rate of a currency pair. For Forex trading, a common minimum limit/ stop distance is 1 pip. Traders often use this setting to ensure that their orders are not executed too close to the current market price, allowing for some market fluctuation.
Assume a trader is looking at the GBP/USD currency pair, with a simulated current market price (CMP) of 1.3000.
Simulated Limit Order:
Simulated Buy Limit Order: If the trader wants to place a buy limit order, meaning they aim to buy GBP/USD at a price lower than the CMP, the entry price must be set at least 1 pip below the current market price. Therefore, the entry price for the buy limit order would be 1.2999 or lower (1.3000 - 0.0001 = 1.2999).
Simulated Sell Limit Order: Conversely, for a sell limit order, where the trader intends to sell GBP/USD at a price higher than the CMP, the entry price should be set at least 1 pip above the current market price. Thus, the entry price for the sell limit order would be 1.3001 or higher (1.3000 + 0.0001 = 1.3001).
Simulated Stop Order:
Simulated Buy Stop Order: For a buy stop order, which is placed to buy GBP/USD at a price above the CMP, the entry price must be 1.3001 or higher.
Simulated Sell Stop Order: For a sell stop order, aimed at selling GBP/USD at a price below the CMP, the entry price must be set at 1.2999 or lower.
Note: For the EURUSD currency pair, suppose the simulated current bid price is 1.2000 and the simulated ask price is 1.2001. If the trader is in a BUY position, the limit/stop distance would be calculated from the BID price. So, if a stop/limit distance of 10 points (1 pip) is set, it would be applied from the bid price (1.2000) downwards which will be 1.1999.
Conversely, if the client is in a SELL position, the limit/stop distance would be calculated from the ASK price (1.2001) upwards which will be 1.2002.
2. Indices: 1.50 USD
Indices represent a basket of stocks that reflect the performance of a particular market or sector. When trading indices, the minimum limit/ stop distance is usually specified in terms of a fixed monetary value. For example, setting a minimum limit/ stop distance of 1.50 USD means that the order will only be triggered if the market moves at least 1.50 USD away from the current price. This helps traders avoid premature executions due to minor price fluctuations.
Assume the simulated current market price (CMP) of NAS100 is 13,500 USD.
Simulated Limit Order:
Simulated Buy Limit Order: If aiming to buy NAS100, and the CMP is 13,500 USD, the trader should set the buy limit order at 13,498.50 USD or lower (13,500 USD - 1.50 USD = 13,498.50 USD) to buy the index at a price lower than the current market price.
Simulated Sell Limit Order: Conversely, for a sell limit order, if the trader wishes to sell NAS100, the entry price must be at least 13,501.50 USD or higher (13,500 USD + 1.50 USD = 13,501.50 USD) to sell the index at a price higher than the current market price.
Simulated Stop Order:
Simulated Buy Stop Order: To enter the market above the current price, a buy stop order must be placed at 13,501.50 USD or higher.
Simulated Sell Stop Order: To enter the market below the current price, a sell stop order must be placed at 13,498.50 USD or lower.
Note:
Now, let's consider the DAX, which is quoted in Euros. Suppose the DAX is trading at simulated price of €14,000. We need to convert the $1.5 limit/stop distance into Euros using the current exchange rate. Let's assume the exchange rate is 1 euro = $1.10. So, $1.5 would be equivalent to €1.36 (1.5 / 1.10 = 1.36).
Therefore, if we set a limit/stop distance of 1.36 Euros for the DAX, it would be equivalent to the $1.5 limit/stop distance for the S&P 500, considering the exchange rate.Moving on to the Japan 225 (Nikkei 225) index, suppose it is trading at simulated price of 30,000 Japanese yen. We'll need to convert the $1.5 limit/stop distance into Yen using the current exchange rate. Let's assume the exchange rate is 1 US dollar = 110 Japanese Yen. So, $1.5 would be equivalent to 165 Japanese Yen (1.5 * 110 = 165).
Therefore, if we set a limit/stop distance of 165 yen for the Japan 225 index, it would be equivalent to the $1.5 limit/stop distance for the S&P 500, considering the exchange rate.
3. Gold/ Commodities: 0.20 USD
Trading in commodities like gold involves its own set of considerations. Similar to indices, the minimum limit/ stop distance for gold and other commodities is often specified in a fixed monetary unit, such as 0.20 USD. This ensures that traders have a buffer in place, guarding against rapid price changes that might trigger orders too close to the current market value.
Assume the simulated current market price (CMP) of Gold is 1800 USD per ounce.
Simulated Limit Order:
Simulated Buy Limit Order: If a trader wishes to place a buy limit order for Gold, aiming to purchase it at a price lower than the CMP, the entry price must be set at 1799.80 USD or lower (1800 USD - 0.2 USD = 1799.80 USD). This ensures the order is at least 0.2 USD away from the current market price.
Simulated Sell Limit Order: Conversely, for a sell limit order, where the trader intends to sell Gold at a price higher than the CMP, the entry price should be set at 1800.20 USD or higher (1800 USD + 0.2 USD = 1800.20 USD).
Stop Order:
Simulated Buy Stop Order: If the trader wants to enter the market above the current price with a buy stop order, the entry price must be at least 1800.20 USD or higher.
Simulated Sell Stop Order: For placing a sell stop order to enter the market below the current price, the entry price must be 1799.80 USD or lower.
Understanding the Significance
Setting minimum limit/ stop distances is crucial for risk management and order execution strategy. It helps traders avoid unnecessary losses caused by market noise or sudden price spikes. By defining a minimum distance, traders can filter out minor fluctuations, allowing for a more strategic and controlled approach to order execution.