Pending orders are instructions given by traders to their brokers or trading platforms to buy or sell an asset at a specific price in the future. These orders are also known as limit orders or stop orders and allow traders to set up trades ahead of time, even when they are not actively monitoring the market.
Pending orders are useful for traders who want to enter or exit the market at specific price levels without having to monitor the market constantly. However, it is important to note that there is no guarantee that the order will be executed at the desired price, as the market may move too quickly or not reach the specified price at all.
The principle of operation of a pending order is that it is an order that is set up in advance to execute automatically when certain market conditions are met. The trader specifies the price level and direction (buy or sell) at which the order should be executed, as well as any additional conditions such as stop loss and take profit levels.
When the price of the asset reaches the specified level, the pending order is triggered and executed automatically, without any additional action required from the trader. For example, if a trader sets up a buy limit order at a price of 1.3000 for a currency pair, the order will be executed automatically if the price reaches or falls below 1.3000.
Overall, the main use of pending orders is to automate trades and allow traders to take advantage of market opportunities without having to constantly monitor the market.
What is the use of pending orders?
Pending orders have several uses in trading, including:
- Automation: Pending orders allow traders to automate their trading strategies by setting up buy or sell orders at specific price levels. This allows them to take advantage of market opportunities without having to monitor the market constantly.
- Risk Management: Pending orders can be used to manage risk by setting up stop-loss orders to limit potential losses or take profit orders to lock in profits. This helps traders to minimize losses and maximize gains.
- Price Targets: Pending orders can be used to set price targets for entering or exiting trades. This allows traders to enter a trade at a desired price level, or exit a trade at a predetermined profit or loss.
- Volatility Management: Pending orders can be used to manage volatility by setting up buy-stop or sell-stop orders. These orders allow traders to enter a trade when the market breaks out of a range, or exit a trade when the market experiences a sudden shift in direction.
Overall, pending orders are a useful tool for traders to manage their trading strategies, minimize risk, and take advantage of market opportunities.
Main types of pending orders
The main types of pending orders in trading are:
Buy Limit Order
A Buy Limit Order is a type of pending order used in trading that instructs a broker to buy an asset at a specified price or lower. The order is executed only when the market price of the asset reaches or falls below the specified price level.
For example, let’s say that the current market price for EUR/USD is 1.2200, but a trader believes that the price will decrease before it rises again. The trader may place a Buy Limit Order at a price of 1.2100, with the intention of buying the currency pair when the price reaches that level or falls below it. If the price falls to 1.2100 or below, the Buy Limit Order is automatically executed, and the trader buys the currency pair at the specified price or lower.
A Buy Limit Order in Forex is often used by traders who want to buy a currency pair at a lower price than the current market price, but only if the price reaches a certain level.
Sell Limit Order
A Sell Limit Order is a type of pending order used in trading that instructs a broker to sell an asset at a specified price or higher. The order is executed only when the market price of the asset reaches or exceeds the specified price level.
For example, suppose the current market price for a stock is $50, but a trader believes that the price will increase before it starts to fall again. The trader may place a Sell Limit Order at a price of $55, with the intention of selling the stock when the price reaches that level or goes above it. If the price rises to $55 or above, the order is automatically executed, and the trader sells the stock at the specified price or higher.
A Sell Limit Order is typically used by traders who want to sell an asset at a higher price than the current market price, but only if the price reaches a certain level.
Buy Stop Order
A Buy Stop Order is a type of pending order used in trading that instructs a broker to buy an asset at a specified price or higher. The order is executed only when the market price of the asset reaches or exceeds the specified price level.
For example, suppose the current market price for a stock is $50, but a trader believes that the price will increase further before it starts to fall again. The trader may place a Buy Stop Order at a price of $55, with the intention of buying the stock when the price reaches that level or goes above it. If the price rises to $55 or above, the order is automatically executed, and the trader buys the stock at the specified price or higher.
A Buy Stop Order is typically used by traders who want to buy an asset at a higher price than the current market price, but only if the price reaches a certain price level. They are used in stop-loss orders for sell trades.
Sell Stop Order
A Sell Stop Order is a type of pending order used in trading that instructs a broker or trading platform to sell an asset at a specified price or lower. The order is executed only when the market price of the asset reaches or falls below the specified price level.
For example, suppose the current market price for a stock is $50, but a trader believes that the price will decrease further before it starts to rise again. The trader may place a Sell Stop Order at a price of $45, with the intention of selling the stock when the price reaches that level or falls below it. If the price falls to $45 or below, the order is automatically executed, and the trader sells the stock at the specified price or lower.
A Sell Stop Order is typically used by traders who want to sell an asset at a lower price than the current market price, but only if the price reaches a certain level. They are used in stop-loss orders for buy trades.
Each of these types of pending orders has its own specific use and can be used to implement different trading strategies. It’s important for traders to understand how to use each type of pending order effectively and to have a clear trading plan in place before executing any orders.
Example of pending order in Forex
Let’s say that the current market price for EUR/USD is 1.2000, and a trader believes that the price will continue to rise if it breaks through the resistance level at 1.2050. The trader can set a buy-stop order at 1.2050, which means that if the price reaches this level, the order will be automatically triggered and a long position will be opened.
Alternatively, if the trader believes that the price will decrease if it falls below the support level at 1.1950, they can set a sell-stop order at 1.1950. If the price reaches this level, the order will be triggered and a short position will be opened.
It’s important to note that there is no guarantee that the order will be executed at the desired price, as market conditions can change rapidly. Traders should always consider the risks involved and use appropriate risk management strategies, such as setting stop-loss orders when placing pending orders in the forex market.
Advantages of pending orders
There are several advantages of using pending orders in trading, including:
- Automation: Pending orders allow traders to automate their trading strategies and take advantage of market opportunities without having to constantly monitor the market.
- Precise Entry and Exit: Pending orders allow traders to enter and exit trades at precise price levels, which can help to minimize slippage and improve overall trade execution.
- Risk Management: Pending orders can be used to manage risk by setting up stop-loss orders to limit potential losses or take profit orders to lock in profits.
- Flexibility: Pending orders can be set up to suit a wide range of trading strategies and objectives, making them a flexible tool for traders.
- Emotional Control: Pending orders can help traders to avoid emotional trading decisions and stick to their trading plan, which can improve overall trading discipline and performance.
Conclusion
In conclusion, pending orders are a valuable tool for traders to manage their trading strategies, minimize risk, and take advantage of market opportunities. They allow traders to automate their trades, set price targets, and manage volatility. However, it’s important to remember that pending orders are not a guarantee of execution, and market conditions can change rapidly, leading to slippage or even order rejection. It’s crucial for traders to have a clear understanding of the risks involved and to use appropriate risk management strategies, such as setting stop loss orders, when using pending orders. With proper usage and risk management, pending orders can help traders to achieve their trading objectives and maximize their profits in the markets.
