Protecting Profits and Minimizing Losses

You can lock in a profit or minimize a loss by using Stop, Limit or OCO orders. A Stop order can be used to liquidate a position that is losing value. A Limit order can be used for the purpose of securing a profit. The OCO, One Cancels Other option, is the combination of a Stop and Limit order that will come into effect with a major adjustment. If one half of an OCO order is filled, the other half is cancelled automatically. If one placed both a Stop and Limit order for a particular position separately one could end up in the uncomfortable position of having both the Stop order and the Limit order triggered. In this sort of situation where both the Stop and Limit order were triggered, one would be left with a position going in the opposite operation of the original one.

Stop and Limit orders are not always used for the defensive purpose of holding to profits or preventing large losses. Traders often use these types of orders to notify the Deal Desk that they would like to enter positions in the market when certain price levels are reached. Although there is no technical difference between opening and closing positions with Stops or Limits, for the purposes of this section, a Stop or Limit used to close a position will be referred to as defensive.

For market orders, one must wait for the order to be executed before placing a defensive Stop, Limit or OCO order. The Stop, Limit or OCO order should bear the opposite operation of the position it is liquidating. BUY positions can only be liquidated with SELL orders; SELL positions can only be liquidated with BUY orders.

For example, if one had a 5 unit BUY JPY position, one would logically place a Stop SELL JPY order for 5 units, or place an OCO SELL JPY order for 5 units.

Stop, Limit, and OCO orders are a means for traders to limit losses or to lock in profits. However, keep in mind that if your open position is closed, the existing orders will remain valid until cancelled by the Trader or executed by the Deal Desk. Be aware of all your open orders in order to prevent having unwanted positions opened in the market. The Deal Desk is obligated to execute all orders placed when the appropriate market levels are reached.

[Warning: During volatile market conditions, stop orders may not be executed at the exact rate(s) specified.]