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  • Leverage and Orders

    When trading we should make use of all the tools we have at our disposal. Leverage and orders are two powerful tools we have in our trading arsenal; however, they need to be used in the correct way otherwise we may achieve results that are less than satisfactory. Leverage is certainly one such tool, often referred to as a ‘double edged sword’, we need to be mindful we are using this tool to our advantage and not to our detriment. Orders are effectively the method of executing a trade in the financial markets. There are numerous types of orders to help open a new trade, manage our risk once a trade is open as well as to capture profits from profitable trades. Some might say that orders are the most important of all tools available to us, as such we need to have implicit knowledge of the various types and how to use them flawlessly.

    Pending orders come in two different varieties: limit orders and stop orders.

    Buy limit orders instruct that a long position is opened when the market price reaches a level lower than the current price, sell limit orders instruct that a short position be opened when the market price reaches a level that is higher than the current market price.

    Buy and Sell limit orders should not be confused with the similarly titled limit orders on the order ticket. The latter is an order to close out a profitable trade and will be discussed in more detail below.

    Conversely, buy stop orders are entered above the current market and sell stops are entered below the current price.

    In summary, limit orders are used when you are aiming to enter a trade at a better price than the market is currently trading at, for example, if you are anticipating a pullback. On the other hand, stop orders are used when you anticipate that price action will continue in its current direction, one example would be if you were trading a breakout strategy.

    In both instances, you are not guaranteed to enter at the price specified on your order, as in volatile market conditions price slippage could occur.

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