Introduction
In this article, we'll explore what minimum limit/ stop distances are and delve into specific examples for Forex, Indices, and Gold / Commodities.
What is Minimum Limit/ Stop Distance?
Minimum limit / stop distance refers to the minimum price movement required for a trader to set a limit or stop order on a particular financial instrument. This distance is often expressed in terms of pips or a specific monetary value, depending on the asset class being traded. Traders need to be aware of these minimum distances as they directly impact the precision of their trading strategies.
Forex: 1 pip or 10 points
In the foreign exchange (Forex) market, the minimum limit/ stop distance is commonly measured in pips. A pip, which stands for "percentage in point" or "price interest point," is a standardized unit of movement in currency pairs. For forex trading on our platform, the minimum limit/ stop distance is set at 1 pip.
For example, if a trader wants to place a limit order to buy a currency pair, the entry price must be at least 1 pip below the current market price. Conversely, for a sell limit order, the entry price should be 1 pip above the market price. This minimum distance allows for more accurate execution.
Assume a trader is looking at the GBP/USD currency pair, with a current market price (CMP) of 1.30000.
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 1.29900 or lower (1.30000 - 0.00100 = 1.29900).
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 (1.30000 + 0.00100 = 1.30100).
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 1.30100 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 1.29900 or lower.
Note: For the EURUSD currency pair, suppose the current bid price is 1.20000 and the simulated ask price is 1.20100. 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 downwards which will be 1.9900.
Conversely, if the client is in a SELL position, the limit/stop distance would be calculated from the ASK price upwards which will be 1.20100.
Indices: 1.50 USD
When trading indices, the minimum limit/ stop distance is expressed in monetary terms, specifically in the currency of the index. For instance, if the minimum limit/ stop distance for an index is set at 1.50 USD, it means that the entry price for a limit or stop order must be at least 1.50 USD away from the current market price.
This distance requirement helps ensure that orders are not triggered by minor price fluctuations, promoting more reliable and deliberate trade executions. Traders in the indices market should be mindful of this minimum distance when crafting their trading strategies.
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.
Gold/Commodities: 0.2 USD
Gold and other commodities also have their own minimum limit/ stop distance, typically expressed in monetary terms. For example, if the minimum limit/ stop distance for gold is set at 0.2 USD, traders must adhere to this requirement when placing limit or stop orders.
This minimum distance is designed to prevent premature triggering of orders due to small price movements, especially in the volatile commodities market. By maintaining a minimum limit/ stop distance, traders can enhance the precision of their trading strategies and better manage their risk exposure.
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).
Simulated 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.
Conclusion
Understanding and adhering to minimum limit/ stop distances is a fundamental aspect of successful trading across different asset classes. Whether trading forex, indices, or commodities like gold, being aware of the specific minimum distances for each market is important. By incorporating this knowledge into their trading strategies, investors can navigate the financial markets with greater precision and confidence.