Pending Orders Explained

The previous article dealt with how an entry is made: either at market or with a pending order. The conclusion was that trading with pending orders implies that a certain degree of planning takes place before placing the orders. A plan means having a strategy for future prices to come, and this gives a competitive advantage against the violent swings to be found on the Forex market. Planning is good for any kind of business or project, and it is the same in trading. If one is planning to buy or sell from a higher or lower level only if the price moves to that level, it will eliminate most of the randomness from the Forex market, which is a difficult thing to do. Nevertheless, trading with pending orders, having a stop loss and a take profit level for every trade, and applying money management principles to the way a portfolio is traded, is the way to success in Forex trading.

Types of Pending Orders

Depending on the trading platform, there are multiple types of pending orders to be used. Not all platforms offer all of them, but it is important to know that they exist, and how they can be used.

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Pending Buy Limit Order

To buy at limit, the price needs to move lower than the current level. This is a pending order that is useful in rising trends, or a bullish one when traders are looking to add to an existing position. To do that, a pending buy limit order can be placed. Any pending order has a stop loss and a take profit level as well; that is, if the trader decides to place them. If not, the broker will simply execute the order as it is, with empty spaces on the stop loss and take profit level. This is risky trading, though, as the market may move quite fast, and huge losses can be incurred.

Pending Sell Limit Order

A pending sell limit order is the opposite of the one described above, which means it can be used with bearish or falling trends, or whenever traders want to sell from higher levels. In a strong trend, using such pending orders allows for adding to the initial position. Scaling into a position for a better moving average is also possible with pending limit orders.

Pending Buy Stop Order

Buy stop orders are used when traders want to buy from higher levels. This happens when the market is forming a bullish pattern, but the pattern is not yet completed. For example, it may be that the market is forming a contracting triangle at the end of a bearish double combination. A triangle like this implies a bullish reaction by the time the b–d trendline is broken. Therefore, conservative traders (using pending orders to enter a trade is viewed as a conservative approach) will rather place a pending buy stop order above the b–d trendline. If the pending order gets filled, it means that the triangle is completed. If the triangle breaks higher, it means that the whole double combination or the previous bearish trend was completed, and it must be corrected. In this case, patience was enough to give the perfect entry. The risk here is that the trader will enter long before the triangle ends and, if the triangle forms on a longer timeframe, such as the daily chart or even longer, it may take a while until the b–d trendline gets broken. Unwanted costs such as negative swaps can be avoided by simply staying disciplined by using pending orders.

Pending Sell Stop Orders

Such an order is the opposite of the one described above, and it is used when the market is forming a bearish pattern. If in the previous example a triangle was used, let’s assume the market is forming a bearish rising wedge pattern.
Pending Orders Explained - 1
The chart above shows the EUR/USD currency pair on the hourly chart. The recent move higher is by no means an impulsive wave (according to the Elliott Waves theory, which we’ll discuss later in this project), and we can see that it is taking the shape of a rising wedge. A rising wedge is a bearish pattern, and, while current price action is extremely bullish (the market is at the highs now), traders should look for the moment when the wedge breaks lower. This happens when the lower trendline is broken. At this moment in time, there are two options: either wait for the market to break the lower trendline, and stay in front of the screens until it happens; or place a pending sell stop order at that level. This allows for a rational decision to be taken, and hence emotions are eliminated. A classical stop loss for this trade would be at the highs of the wedge (the maximum value the EUR/USD printed during the wedge formation); and the take profit should be at the start of the wedge. The usual situation is that the market will move faster to the take profit than it moves to the upside during the wedge formation.

Trailing Stops Orders

If trading is done on longer timeframes, the trailing stop order is quite a handy one to use. This order will not have a fixed level for the stop loss, but one that moves according to how the market moves. There are some limitations to the trailing stop order, as there is a minimum distance to be kept between the actual price and the trailing stop, but it is a great tool for keeping profits locked in. If the position is in profit with, say, 100 pips, the trader can place a trailing stop order 25 pips below the market price. This means that if the market moves straight down by 25 pips, the trailing stop is reached and the profit made is 75 pips. On the other hand, if the market moves to the upside another 50 pips, the stop loss order will “trail” price, and it will move accordingly while keeping the 25 pips distance. This is done automatically, and at a specific moment in time the trend will falter and the trailing stop will be reached. However, bigger profits are made with such a strategy, while the risk is contained. So powerful is this type of pending order that it is widely used in Forex trading.

One-Cancels-Other (OCO)

Some trading platforms allow traders to place two pending orders at the same time: one at a higher level and the other at a lower level when compared with the actual price. The moment one is filled, the conditions are filled automatically on the trading platform (such as the stop loss, the exit level, and the filling price), and the other trade that was part of the OCO order is cancelled automatically as well.

As you can see, there are multiple ways to use pending orders in a disciplined way, and usually a conservative approach is the way to succeed in Forex trading. Without discipline, traders are subject to emotional pitfalls that will be reflected in the trading account over the long run.

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