The concept of pending orders can seem somewhat complicated to new traders. The way they are used or why they are used at all is not that obvious compared to the standard trading orders. Pending orders help traders to automate the process of trading and to remain in the market while being not in front of their Forex terminals. There are four basic types of pending orders and two derived types (which are quite popular):
- Buy Limit is used if you want to buy a currency pair (open a long position) at a level, which is below the current price. For example, EUR/USD is currently trading at 1.2378; you believe that it can reach as low as 1.2300, and then it will rise. If you want to have an automatically triggered buy order at 1.2300, you should use a Buy Limit pending order. Basically, a buy limit order lets you enter a trade at a better rate than currently available.
- Sell Limit should be used when you want to sell a currency pair (open a short position) at a level, which is above the current price. For example, GBP/USD is currently trading at 1.4531, and you believe that if the currency pair reaches 1.4700, it will surely go down after that. If you want your broker to enter a short position at 1.4700, you should use a Sell Limit pending order. Like a buy limit order, a sell limit order lets you enter a trade at a more favorable rate than the current market offers.
- Buy Stop is a pending order to buy a currency pair (open a long position) at a level, which is above the current price. For example, USD/JPY is currently trading at 92.46; you believe that if the currency pair goes up to 92.55, it will trigger an upward trend (e.g., a major resistance level will be broken). If you want to have a long position at 92.55 automatically, you should use a Buy Stop pending order. With a buy stop order, you always enter at a price worse than you get when set up the order.
- Sell Stop is a kind of a pending order used to sell a currency pair (open a short position) at a level, which is below the current price. For example, EUR/JPY is currently trading at 114.28, and you believe that if the pair declines to 113.40, it will trigger a strong bearish movement (e.g., a major support level will be broken). If you want to have a short position open automatically at 113.40, you should use a Sell Stop pending order. A sell stop order implies that you are ready to sell at a price worse than the currently available.
- Stop-Loss is used to prevent an excess loss on a position. It is automatically triggered whenever the price reaches a designated level. It can only be set to the level above the current price for short positions and to the level below the current price for long positions. It is a Buy Stop for your Sell trades and a Sell Stop for your Buy trades. Almost all Forex brokers feature trading platforms that provide an opportunity to set stop-loss as a simple parameter of a position or an order.
- Take-Profit is used to close a position with a satisfactory amount of profit. Similar to a stop-loss, it is triggered automatically at a certain level. It can only be set to the level below the current price for the short positions and to the level above the current price for the long positions. It is a Buy Limit for your Sell trades and a Sell Limit for your Buy trades. Almost all trading platforms allow setting a take-profit as a simple parameter of a position.
Now you should be able to use pending orders without too much trouble. It is always recommended to use stop-loss and take-profit orders, and it is sometimes more prudent to use stop/limit orders to enter positions, especially when you expect a market to retrace to a certain level before continuing its trend.
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