You may have heard the term limit order used when discussing foreign exchange and money transfers. In order to explain how a limit order works we will use an example of converting pounds into Euro’s to buy a property abroad.
Limit orders definition
Essentially a limit order allows you to predetermine the exchange rate in which you are happy for your pounds to be converted into Euro’s. Limit orders are an agreement between you and a foreign exchange broker to buy one currency in exchange for your pounds at a pre-agreed exchange rate. For instance you may be happy to convert your pounds into Euros at a rate of 1.5 but would not be happy to do so at 1.40 therefore your foreign exchange broker can put a limit order in place and will automatically carry out your conversion when the market reaches 1.5.
Advantages of using a limit order
- You save time – instead of having to constantly monitor rates you have set up an automatic action that will act on your behalf as soon as your optimum exchange rate is reached.
- As long as you are realistic about the rate you want to achieve and it is not too far above the current exchange rate your transaction should be carried out pretty swiftly.
Disadvantages of using a limit order
- The exchange rate you want may never be achieved.
- Huge fluctuations can occur on exchange rates especially between two volatile currencies. If rates move against you and begin to drop rapidly after you have placed your limit order you may have a serious problem. At this time you should consult your currency broker to find out the cause of the sudden fall. If the chances of the exchange rate recovering are slim you will need to consider lowering your limit order.
- On the other hand the rate you wanted is achieved and your transaction is completed. However you continue to monitor the markets and see that the exchange rate continues to rise and if you had waited you would have received even more currency for your pounds.
Please remember that most banks do not offer this service so if you are interested in using a limit order you will need to contact a specialist money transfer broker. These companies allow you to buy a limit order, offer far more competitive exchange rates than the banks and operate with much tighter margins.
Common example of buying a house abroad
Mr and Mrs Smith are buying a property overseas in Greece for 380,000 Euros. They have six weeks before the final house settlement must be received in Greece. They can afford to buy the property at an exchange rate of 1.45.
Mr Smith was constantly monitoring exchange rates are finding himself fretting over every dip whilst Mrs Smith after speaking with a foreign exchange broker decided to put a limit order at the rate of 1.45 whilst the current Euro rate was at 1.42. Sure enough as soon as the exchange rate hit 1.45 the currency conversion was completed and Mr and Mrs Smith were able to afford their dream home in Greece. The rate did go slightly over 1.46 but this only lasted a short period before the rate began to fall again quite rapidly.
Limit orders are fantastic for removing stress and emotions from your foreign exchange transactions however they do involve a certain amount of risk. If in the example above the exchange rate had began to fall rapidly Mrs Smiths rate of 1.45 would never have been achieved and the couple would have had to rethink their strategy.
It is wise to speak to a foreign currency specialist to get information on why movements are occurring in the market and what they consider to be a realistic achievable exchange rate at which to set a limit order. Unfortunately nobody (not even the currency experts) can predict exchange rate movements but what a specialist can do is explain historic movements and any up and coming planned events which may impact the future exchange rate.
At Compare Currency we aim to bring you impartial information on money transfer services. Our International Payments table enables you to compare the UK’s leading money transfer companies side by side which will enable you to find the best company for your requirements.
