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Forex Trading Basics: The 4 Most Common Pending Orders

   

pending-forex-orders

If you’re new to trading forex, you’re probably eager to jump into the deep end and learn through trial and error. And, if you have a basic understanding of trading fundamentals, you probably have a vision for how those trades will be executed: opening a position and then selling once prices have risen and you’ve claimed your profit.

In reality, though, trading is far more complex—and the pending orders forex traders use vary widely in how they’re used to fulfill your trading goals. While some forex order types are designed to open a position at the market rate, for example, others are more focused on entering at a specific price.

Similarly, while certain orders are executed with the intent of holding your position until further notice, others are designed to trigger an automated sell-off if prices move below a certain threshold. If you don’t know the differences between these different order types—including the relative advantages and disadvantages each one offers—it could limit your trading ability while also causing you to execute the wrong type of trade. 

In the wrong situation, this could lead to significant losses that could have been avoided with a little education into the different types of orders at your disposal. With that in mind, here’s a look at the most common order types you need to know when getting started in forex.

Market Orders

A market order is the most straightforward forex order. Similar to making an online purchase, placing a pending market order allows you to immediately purchase or sell currency at the current market price—no contingencies or delays are involved. 

Day traders who are using a short-term strategy may choose to keep an eye on price and create market orders as trading opportunities arise. For longer-term forex strategies, traders often favor stop-loss, stop-entry, and limit-entry orders because they allow them to make trades and balance risks and rewards without staying glued to the computer.

Advantages: Market orders let you open a position quickly, which can be advantageous if prices are moving fast and you want to jump in to capitalize on this momentum. It’s also a simple order type, making it easy for beginners to utilize.


Disadvantages: Market orders are executed at the going rate, which may not be ideal for traders looking for price deals. Market orders also don’t have any protections to limit your losses if prices move in the wrong direction.

Shown below is an example of a market order and pending order

Orders

Stop-Loss Orders

Stop-loss orders (aka “stops”) are meant to curb the risks associated with a given trade by placing a hard-and-fast limit on potential losses. They can be fixed-value stops (buy stops and sell stops) or trailing stops that change value relative to price movement.

Advantages: Stop-loss orders limit your liability by triggering a sale if your predicted price movements don’t come to fruition.


Disadvantages: If you set your stop-loss too close to your entry point, you won’t have much wiggle room to realize profits before you’re forced to sell. In some cases, a stop-loss may not account for price variations that occur prior to a price movement you have predicted through your research.

Buy Stops and Sell Stops

If you’ve entered into a long position (bought a currency in anticipation that price will increase), a sell stop order should be placed below the current market price to curb potential losses in the event that price falls against you. 

For a short position, a buy stop-loss order should be placed above the current market price. “Placing” a buy stop or a sell stop means preemptively identifying a price that, if reached, will automatically trigger the order in question and exit you from the trade.

Advantages and Disadvantages: They are the same as with a stop-loss order.

Trailing Stops

Rather than presetting a value at which to exit a trade, a trailing stop allows traders to dictate how many pips they’re willing to risk losing and will automatically shift their stop value so that it remains a fixed distance away from the current market price. 

Doing so enables traders to remain in a trade through small price fluctuations, exiting them from their position if the price rises or falls beyond their stipulated range. Traders using trend-following strategies favor trailing stops because they enable them to hold their position through small dips or rises that are inconsistent with the overall trend.  

Although stop-loss orders do not prevent losses, they allow traders to dictate the amount of loss they’re willing to risk before exiting their position—and then walk away from their computers.

Advantages: Trailing stops let you lock in profits at a certain level while still allowing traders to see if trading momentum continues.


Disadvantages: Trailing stops are only a relevant strategy for positions that yield strong profits. In some cases, reliance on trailing stops can cause traders to overlook other information when evaluating the value of their position.

Stop-Entry Orders

Unlike stop-loss orders, stop-entry orders are used to capitalize on profit opportunities rather than curb losses. As the name suggests, they enter traders into a position rather than exit them from an existing trade. Stop-entry orders are trend-following orders. In other words, they’re most effective in trending markets—as opposed to choppy or sideways-trending markets—in which price oscillates between periods of strong uptrends and strong downtrends.

A buy stop-entry order is placed above the current market price and will automatically purchase a given currency (entering the trader into a long position) if an uptrend in price triggers the order. A sell stop-entry order is placed below price, entering a trader into a short position in the event of a downtrend.

Traders often place opposite buy and sell stop-entry orders simultaneously in an effort to cover all their bases and profit no matter what direction the trend takes. That said, it’s important to close out the untriggered position and create additional stop-loss orders to mitigate risks once a position has been opened.

Advantages: This is a popular order type for traders focused on trends and traders who value breakthroughs and Fibonacci levels in their trading strategy.

Disadvantages: Because of the circumstances required to make this order type a useful one in leveraging trading opportunities, stop-entry orders aren’t particularly common. And, by the time the order is triggered for a buy or sell action, a certain amount of price movement has already occurred.

Buy Sell Stop Entry Order

Limit-Entry Orders

Limit-entry orders are used by traders who are anticipating a trend reversal. They can be placed to buy below the current market price or sell above the current market price. The value of a limit-entry order (above or below the current price) is the point at which a trader anticipates the market will reverse. 

When attempting to trade against the trend with limit-entry orders, it’s exceptionally important to place stop-loss orders to limit losses in the event that the trend continues or takes longer to reverse than originally anticipated.

Advantages: Limit-entry orders can be a great value play to open a position at a greater value, which, in turn, improves your profit potential.

Disadvantages: Some traders are overly focused on trends and reversals and maximizing their profits and end up missing out on strong trading opportunities because of their determination to secure the lowest price possible.

Buy Limit Entry Order

Sell Limit Entry Order

To determine what type of order you should place and where to place it, you’ll need to understand the market and the current trend. Trend lines and tools that use moving averages can help you identify and confirm trend direction and strength, and tools such as Bollinger Bands and oscillators will help you identify overbought and oversold conditions to locate ideal entry, exit, and profit-taking points.

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Disclaimer:

The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.

This post was written by Graeme Watkins

CEO Valutrades Limited, Graeme Watkins is an FX and CFD market veteran with more than 10 years experience. Key roles include management, senior systems and controls, sales, project management and operations. Graeme has help significant roles for both brokerages and technology platforms.

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