The concept of pending orders may seem complicated to new traders, and it may not be clear how to use them or even why they are used in the first place compared to standard trading orders.
Pending orders help automate trading operations while staying in the market without spending long periods in front of the forex platform. There are four basic types of pending orders which can be divided into two main groups (each representing the most common orders):
Stop and limit orders
This order is used if you want to buy a currency pair (open a trading position) at a level below the current price. For example, let’s assume that the Eurodollar pair is currently trading at 1.2378, and you thought it would fall to 1.2300 before rising again.
If you want to place a buy order that will be activated automatically once the price reaches 1.2300, you will have to use a limit buy order, which allows entering the trade at a better price than the current one.
It should be used when you want to sell a currency pair (open a short position) at a level higher than the current price. For example, if the pound/dollar pair is currently trading at 1.4531 and you think that if it rose to 1.4700, it will bounce back down after touching this level.
In this case, you can use the pending sell limit order if you want the brokerage firm to open a sell position for you as soon as the price reaches 1.4700.
As with a limit buy order, a limit sell order aims to enter the trade at a better price than the price currently available in the market.
This is a pending order to buy a currency pair (open a buy position) at a price higher than the current price. For example, if the dollar/yen pair is currently trading at 92.46 and you believe that the price reaching 92.55 will trigger a new uptrend (for example, as a result of breaking a vital resistance level).
In this case, you can use the pending stop buy order if you want to open a buy position automatically as soon as the price reaches the level of 92.55.
This is a pending order used to sell a currency pair (open a sell position) at a level below the current price. For example, if the EUR/JPY pair is currently trading at the level of 114.28 and you believe that a decline in the price to the level of 113.40 will trigger a robust descending wave (for example, due to breaking a critical support level).
In this case, you can use the pending sell-stop order to open a sell position once the price reaches 113.40 automatically. A stop-sell order assumes that you are willing to sell at a less favourable price than the current price available in the market.
Stop and limit orders
Stop loss and take profit
A stop loss is an order to prevent a significant loss in a trade. This order is triggered once the price reaches the specified level. The stop loss order is placed at a level higher than the current price in the case of short trades, while it is set at a level lower than the current price in long trades.
The Stop Loss order is included in the stopped buy in the case of the short deals, while it is included in the stopped sell in the case of the long sales. Almost all forex brokers provide trading platforms that allow the use of a stop-loss order and its attachment to orders or trading positions.
This is an order to close a position after achieving the desired profit. As with the stop loss, the take profit order is triggered automatically when the price reaches a specified level.
The Take Profit order is placed at a level lower than the current price in the case of short trades, while it is set at a level higher than the current price in long trades. This order is included in limit buying with fast deals, while in limit selling in case of long deals. Almost all trading platforms allow taking profit orders to be attached to trading positions and orders.
Limit stop orders
Buy Stop Limit is an order that combines the advantages of ‘Buy Stop’ and ‘Buy Limit’ orders. This type of order is used to buy a currency pair at a level higher than the current market price but on condition that the price is at or below the limit level chosen by the trader. A buy-stop order is triggered when the price reaches the stop level set by the trader. But when a Buy Stop becomes a market order at any price available at the moment of execution, a Buy Stop Limit order becomes a limit order to buy at or better the specified price.
For example, the USD/CHF pair is currently trading at 0.9914. If you think that the price breaking above 0.9940 will create an uptrend, then consider buying the currency pair. But you prefer to buy on retracement and only want to pay up to 0.9927. In this case, you can place a stop order at 0.9940 and a limit order at 0.9927. This will ensure that the order will be triggered when the price reaches 0.9949, but will only be executed if the price is at 0.9927 at the time of execution.
Buy Stop Limit allows you to optimize and better control the results of your buy orders. A Buy Stop may result in you buying at a higher price than expected due to market gaps, delayed execution by your broker, or other reasons. Conversely, a Buy Stop Limit order ensures that you only buy from the specified level.
As a strictly limit order, there is always the possibility that the Buy Stop Limit order will not be executed if the price jumps above your desired limit and continues higher.
Important note: The above description is based on the MetaTrader platform, which allows placing a limit order (the limit stop price) below the stop level (price) when opening a Buy Stop Limit order.
Sell Stop Limit
This is similar to the Buy Stop Limit but combines the advantages of ‘Sell Stop’ and ‘Sell Limit’ type orders. This type of order is used to sell the currency pair at a level below the current market price but is only executed if the price is at or above the limit level set by the trader.
If the price retraces to the level at which the trader placed the stop order, it will turn into a ‘sell limit’ order to sell the pair at or above the trader’s limit.
For example, suppose you want to buy the USD/CAD pair at the current price of 1.3738 but are worried that the price might go down. In this case, you can place a stop order at 1.3640, but what if you don’t want to sell the pair below 1.3670?
You should then open a ‘Sell Stop Limit’ order with the stop at 1.3640 and the limit at 1.3670. This way, if the market moves against you, the pair will be sold when the price goes back to 1.3640, but only if the price is at or above 1.3670 when the order is executed.
The Sell Stop Limit order helps you control your risk by setting the minimum price you want to sell. This feature is not available for ‘sell stop’ order types. But on the other hand, if the price does not bounce back to the limit level before the order is executed and continues to move downward, your losses will increase unless you intervene and sell manually.
Important note: The above description is based on the MetaTrader platform, which allows placing a limit order (stop limit price) above the stop level (price) when opening a sell stop limit order. This mechanism is contrary to the standard description of this type of order which places the limit below the stop.
After reading this article, you should be able to use pending orders without significant problems. One of the essential tips that professional traders give is always to use Stop Loss and Take Profit orders on all trades without exception. Using stop/limit orders is often an ideal option for entering trades, especially if you expect the price to rebound to a certain level before resuming the primary trend.