Figure 2 Limit order

If you look at Figure 1 again you will see that initially the position looked to be a winning one and in an ideal world the position would have been sold at the high of 640p.

Unfortunately it could not be known at the time that the high point of the market would be 640p. Many traders would have run with the trade in the hope of squeezing out more profits, only to be disappointed when the price later fell. To combat this, more and more traders use Limit orders. Limit orders are similar to Stop orders but they are used to capture potential profit.

As can be seen in Figure 2, when the position is opened at 500p in £10 per penny, a Stop (a) at 450p and also a Limit order (b) at 620p are placed. The Limit order now means that should the price rise to 620p, the position will be closed, with the client taking a profit of £1,200 (£10 x 120 points = £1,200).

In this example, the high of 640p has been missed but the Limit order ensured that some profits were taken when the price rose sharply.