This guide is all about how to use pending orders in trading. The currency markets operate 24/7. That's a lot more than any of us can remain sitting at our computer screens, obsessively monitoring each price tick up and down for all our currency positions and everything we want to be in.
That's where pending orders come in. Using pending orders, you can give your broker instructions on when to buy or sell even when you can't be on the computer yourself. You can use these pending orders to protect yourself by automatically exiting your position during a downswing that happens even when you aren't looking. You can also use them to set yourself up to profit if the price reaches an advantageous level for buying when you are away from your keyboard.
These two basic types of orders – to buy or sell at current market prices – are called market orders.
But not everything is always so straightforward. Sometimes, as a trader, you may want to have a ‘standing order’ to sell under specific circumstances or to buy under specific circumstances, without further intervention from you.
These orders are known as “pending orders.” You enter a pending order, and you specify what you want your broker to do if a given security or currency hits a certain price and passes it, either on the way up or on the way down.
In theory, your pending orders help protect you from a market meltdown when you have an open position and you happen to be away from your terminal or otherwise out of touch with your broker and can’t place the order, personally. You can also read about money management techniques in forex trading for better trading.
There are four basic types of pending orders common in forex trading:
- Buy limit – an order to buy a security if the security reaches or goes below a certain price, selected by you. This helps protect you against a sudden price decline. You might set this limit just below an apparent support level, on the theory that if this support level is broken, there's no telling how far the price may fall until it reaches a new level of support.
- Sell limit – an order to sell a security if it reaches or rises above a specified price. This order helps you take some profits off the table. You might set up a sell limit at or above your target price for a security. This is the point at which you believe a security is fully valued.
- Buy stop – Also called a “stop order to buy.” This is an order to buy a security if it reaches a price at or above a certain price. You might set this just above a key point of resistance, on the technical trading theory that if a security breaks through this resistance point, it is set up for a bullish run to the upside.
- Sell stop – A standing order to sell a security if the price plunges below the current asking point. You might place this order just below a key level of support, on the technical theory that if whatever had been kicking in at that price to buy the security in the past is no longer there, the security is set up for a bearish run. You want to be out of the position, or even take a short position, which allows you to benefit from price declines.
The precise procedure for plotting and/or entering them will vary depending on your trading software and brokerage.
Caution: These orders aren't holy writ: If you place an order into a market that is falling or rising fast, and isn't very liquid, you could see the market skip right past your stops or limit orders.
The faster your brokers' execution speed is, the more likely they'll be able to execute your trade at your requested price. But they have to do it by matching your order up with a willing counterparty. There is no guarantee that someone will be out there wanting to buy what you're selling at any given price point.
Your account could suffer losses because prices move beyond your stop and limit orders before your broker is able to execute the order. In other words, your pending orders are only as good as your broker's execution ability. That's not much of an issue in normal times - unless you're trading on very short-term movements and heavily leveraged, or both. But it is a big issue in times of great volatility and uncertainty when bid-ask spreads can be very wide. For more information, read our ultimate broker guide.
Clear as mud?
Let's look at a few examples from the charts I created (Click to see the full graphic).
If your pending order worked, it saved your bacon! But sometimes markets overwhelm limit orders and other pending orders, just by moving too far, too fast, for the broker to match you up with a willing counterpart at that price.
Let's move on to another example, the sell limit order, sometimes used as a 'profit-taking' tactic. That is, once in a while, the trader wants to be sure to take the money and run before the market can turn against him:
These two are defensive moves, designed to help limit your risk. The next two pending orders play offense. They are designed to put you in the way of a trade you have reason to believe has a better than even chance of being successful. (If you think there are sure things in Forex, put your money in CDs).
Here is the buy stop, or the 'stop order to buy,' illustrated with an actual chart:
The last common pending order is the sell stop. Here's how it might work, using a real chart:
Thank you for reading!
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-Jason Van Steenwyk