A foreign exchange limit order allows users to target a higher foreign exchange rate than its current level and if the target is met the order is automatically placed in the market. Limit Orders are a useful tool for individuals and businesses looking to hedge their positions in the FX market without having to get involved in the more pricey and heavily regulated options market.
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Limit Order vs Stop Loss Order
As well as Forward Contracts or FX Swaps, FX Limit Orders and FX Stop Loss Orders are the only hedging tools offered by ordinary FX companies unless they have a separately regulated options business. A stop loss order is in essence the same tool as a currency limit order except it helps to cover downside risk. So your firm order in the market (which automatically agrees to buy currency at a certain rate) has to be below the current spot rate. You can choose to set up either a foreign exchange limit order or stop loss order on their own or set up both at the same time.
Let’s take a look at some examples of both a limit and stop loss order as we look back at the last 12 month GBPUSD rate:
User places a £10,000 limit order of GBPUSD 1.30 on the 1st December 2018 when the spot rate is 1.27581
In this scenario GBPUSD hits 1.30 on the 24th January 2019 and the user achieves this rate to exchange £10,000 to $13,000. A more favourable rate than if the user had just traded his original £10,000 on the spot on 1st December at 1.275. However, they did not receive the benefit of further upside when the rate hits 1.31966 on the 26th January 2019 or 1.33172 on 28th February 2019.
User places a £10,000 limit order of GBPUSD 1.30 and a stop loss order of 1.25 on the 1st December 2018 when the GBPUSD rate is 1.27581
Although the user set up a £10,000 limit order at 1.30, the market moved unfavourably and actually fell below 1.25 on 12th December 2018 when GBPUSD closed at 1.24926 meaning the stop loss order was automatically triggered and the user attained $12,500 from their original £10,000. Whilst the stop loss order protected the user from the downside we can see in July – September 2019 (where the rate fell below 1.25) they weren’t able to benefit from the upside seen in early 2019 as the trade was automatically placed at 1.25 prior to these gains.The only time it went below 1.25 prior to 10th July 2019.
Alternatively if the user could have afforded to lose more downside they could have set up a firm order of 1.30 and a stop loss order of 1.20. The stop loss would have remained untriggered and the user would have benefited when the rate hit 1.30.
FX Limit Order Not to be Confused as an FX Forward Limit Order
When a user books a foreign exchange limit order or a stop loss order, there is a possibility it may be triggered in the future. Due to this it can sometimes be confused as a type of Forward. However this is not the case, the user is simply agreeing to make the trade at a set rate on the spot when the rate is hit. If the parameters of the firm order are so extreme then they may never be hit in the future. A forward contract wouldn’t be based on target rates either it would lock in current FX rate for a point in the future.
A deposit would also be required to setup a forward and you can read more about forwards pricing here. Although the term is not often used it would be better to refer to a limit order as an FX spot limit order.
Are Limit Orders a Good Fit For Me? Should I Buy Limit FX Orders?
Providing you have the time to be flexible with when your target rate is met then fx limit orders can be a great tool for forex transfers, allowing you to benefit from rates higher than what they are today. It should be noted however that the target rate may never be met and you could also be limiting your upside if the rate continues to improve in your favour beyond your target rate. If you set up a stop loss order it may trigger prior to the market moving in your favour again as well.
It must also be remembered you are entering into a legal agreement to make the purchase of currency once the target rate is met. A more flexible solution could be simply setting up a rate alert with your chosen fx partner to be notified when the rate is hit. You would then need to manually go into the market and make a spot fx trade at the point you receive the rate alert. This is something offered by all international money transfer companies we review here, whether they allow buying limit FX orders or not.
Thinking of using other transaction types? View our hedging guide: