A Limit Order is when a client nominates an exchange rate they would like to achieve. The foreign exchange provider will then monitor the market and automatically book the transfer on behalf of the client once the specified exchange rate has been triggered.
A Limit Order is generally more appropriate for people who do not have to transfer money immediately and have the time to monitor the market or are expecting exchange rates to increase.
While a client may specify an exchange rate they would like to achieve to a foreign exchange provider, it is also important to factor in the margin charged by the provider. For example, a client looking to sell GBP 100,000 and buy AUD when the exchange rate reaches 1.90, would also have to factor in the providers margin. If an FX provider charges a 0.5% margin on transfers, then the market would need to reach a rate of 1.9095 in order for the client to achieve a rate of 1.90.
When a limit order triggers, the foreign exchange provider would contact the client to confirm the transaction and ask for payment to be remitted immediately to their account. The beneficiary bank account details will also be taken so the foreign currency can be remitted to the beneficiary upon receipt of the clients funds.
A limit order is not a legally binding transaction until the nominated exchange rate is reached in the market. Up until this point a limit order can be cancelled or amended, however once the market reaches the specified exchange rate the transaction will be booked immediately and thus becomes legally binding.
Of course there is no guarantee the nominated exchange rate will be achieved and markets may fall or move against the client. Therefore some foreign exchange providers offer Stop Loss orders whereby conversely the client nominates the ‘worst case’ exchange rate they would like to obtain should markets continue to fall.
A stop loss protects clients from further losses should the currency market fall, however not all foreign exchange providers offer stop loss orders due to the associated risks.