Using An Overlay For The Entry Price

To keep things simple, normally in these examples we just explain in terms of Long trading. And that will continue here. But also for the purposes of keeping things simple, we also normally just use "Enter At Market" for the entry values - as soon as the entry rules are true, ATM will immediately open a trade using a market order.

ATM can also place limit orders, which allow a slightly different trading style. Here's an example of how they are different:

• open a long trade if the close is above the moving average
• open a long trade as soon as the price hits the moving average

The first style lends itself to market orders. A new price bar comes along, we do the moving average calculation, and if the CLOSE is above that average then we open a trade.

The second style lends itself to limit orders. It's kind of like setting a trap. With the current price below the moving average, we place a long limit order at that moving average. While the current price stays below the moving average, we adjust the order so it stays in-line with the moving average. And if the price ever happens to hit the moving average, our trap is sprung, and the broker will automatically turn our limit order into a trade.

So here's an example of the latter. Our entry price is going to be at the moving average. We will set the stop loss 50 pips below that average, and the take profit 75 pips above.
 

 
Perhaps you see the moving average as a moving resistance level. If so, you wouldn't care so much that the price hits the moving average - you would see that as normal behaviour. If it was acting as resistance then the price would hit the moving average and bounce off. So you would be more interested in the price breaking through the average. In that case use SMA(20) + 0.0010 (or whatever) for the long entry value - the price would have to break through the moving average by 10 pips for the long limit order to be hit.
 

Using limit orders to confirm upward/downward pressure

When explaining about the different scenarios that best suit market orders vs. limit orders, we used this one for market orders: "open a long trade if the close is above the moving average".

Limit orders can also be used here. Instead of entering at market whenever the close is above the average, you can set a limit order to confirm upward pressure.

In our example using market orders, a new price bar comes along, we do the moving average calculation, and if the CLOSE is above that average then we open a trade.

But change the entry value to CLOSE + 0.0010 to use a limit order instead. A new price bar comes along, we do the moving average calculation, and if the CLOSE is above that average then we place a long limit order 10 pips higher than the current price. Only if the price continues to rise a further 10 pips does the trade get opened.

Which method works better? Only backtesting knows the answer.