Limit Orders: How to Lock in Profits

While stop-loss orders are essential for protecting your trades, limit orders are equally important for securing your profits. In this article, we’ll explain what limit orders are, how they work, and why they’re a valuable tool for traders looking to maximise their success.

What is a Limit Order?

A limit order is an automatic exit order that closes your trade when the market reaches a specified profit level. Unlike a stop-loss, which protects you from losses, a limit order helps you lock in gains. For example, if you’re in a long trade and the market moves in your favour, a limit order will automatically close your position at your desired profit level.

How to use a limit order
Let’s use an example with the DAX index. Suppose you buy the DAX at 22,107 and set a limit order at 22,127. This means you’re aiming for a 20-point profit. If the market rises to 22,127, your limit order will automatically close your position, securing your profit without requiring you to monitor the market constantly.

The benefits of limit orders

• Profit locking → Limit orders ensure you take profits at predefined levels, preventing you from giving back gains if the market reverses.
• Discipline → They help you stick to your trading plan by removing the temptation to hold onto a winning trade for too long.
• Convenience → Limit orders allow you to step away from your screen, knowing your trade will be managed automatically.
  
  
  

Stop-Loss vs. Limit Orders: A Winning Combination

While stop-loss orders protect you from losses, limit orders help you capitalise on gains. Together, they form a powerful strategy for managing risk and reward. Here’s how they work in tandem:

• Stop-loss → Closes your trade if the market moves against you by a set amount.
• Limit order → Closes your trade when the market moves in your favour by a set amount.
  
  

By using both orders, you create a balanced approach to trading that prioritises both capital protection and profit maximisation.

Practical example: Trading the DAX index
Imagine you buy the DAX at 22,107. You set a stop-loss at 22,087 (risking 20 points) and a limit order at 22,127 (aiming for a 20-point profit). If the market drops to 22,087, your stop-loss will close the trade, limiting your loss. If the market rises to 22,127, your limit order will close the trade, securing your profit. This approach ensures you have a clear plan for both scenarios.

A word of advice
While limit orders are a great tool, it’s important to let your profits run when the market is strongly in your favour. Don’t set your limit orders too close, as this could cause you to miss out on larger gains. Finding the right balance between taking profits and letting them grow is key to long-term success.

Final Thoughts

Limit orders are an essential tool for traders looking to lock in profits and maintain discipline. When used alongside stop-loss orders, they create a robust strategy for managing risk and reward. Whether you’re a beginner or an experienced trader, incorporating limit orders into your trading plan can help you achieve consistent results.