Pending Orders Explained
The previous article dealt with how an entry is being made: at market or with a pending order. The conclusion was that trading with pending orders implies a certain degree of planning taking place before placing the orders. A plan means having a strategy for future prices to come, and this is a competitive advantage against the violent swings to be found on the Forex market. Planning is good for any kind of business or project. The same in trading. If one is planning to buy or sell from higher or lower levels only if the price is moving to that level, it will eliminate most of the randomness out of the Forex market. And that 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 are offering all of them, but it is important to know that they exist and how can be used.
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 bullish one when traders look 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 incur.
Pending Sell Limit Order
A pending sell limit order is the opposite of the one described above. That means it can be used in 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 possible with pending limit orders as well.
Pending Buy Stop Order
Buy stop orders are being used when traders want to buy from higher levels. This happens when the market is forming a bullish pattern, but the pattern is not completed yet. 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 trend line is broken. Therefore, conservative traders (using pending orders to enter a trade is being viewed as a conservative approach) will rather place a pending buy stop order above the b-d trend line. If the pending order gets filled, it means that the triangle completed. If the triangle broke higher, it means that the whole double combination or the previous bearish trend was completed, and it must be corrected. Patience, in this case, was enough to give the perfect entry. The risk here was that the trader enters long before the triangle ends and, if the triangle is forming on a bigger time frame, like the daily chart or even higher, it may take a while until the b-d trend line gets broken. Unwanted costs like 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 being used when the market is forming a bearish pattern. If on the previous example a triangle was used, let’s assume the market is forming a bearish rising wedge pattern.
The chart above shows the EURUSD currency pair on the hourly chart. The recent move higher it is by no means an impulsive wave (according to the Elliott Waves theory we’ll discuss later this project), and we can see 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 will break lower. This is happening when the lower trend line is broken. At this moment of time, there are two options: either waiting for the market to break the lower trend line and stay in front of the screens until it is happening or placing a pending sell stop order at that level. This allows for a rational decision to be taken, and emotions are eliminated. A classical stop loss for this trade would be at the highs of the wedge (the maximum value the EURUSD printed during the wedge formation) and the take profit should be the start of the wedge. It is accustomed 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 bigger time frames, the trailing stop order is quite a handy one to be used. This order will not have a fixed level for the stop loss, but one that is moving according to 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 to keep profits locked in. If the position is in profit with, say, one hundred pips, the trader can place a trailing stop order twenty-five pips below the market price. This means that if the market is moving straight down twenty-five pips, the trailing stop is reached and the profit made is seventy-five pips. On the other hand, if the market is moving to the upside another fifty pips, the stop loss order will “trail” price, and it will move accordingly while keeping the twenty-five pips distance. This is being made automatically, and at one moment of time the trend will falter and the trailing stop will be reached. However, bigger profits are made with such a strategy, while the risk was contained. Such powerful is this type of pending order, that it is widely used in Forex trading.
Some trading platforms allow traders to place two pending orders at the same time: one at higher levels and one at lower levels when compared with the actual price. By the moment one is filled, the conditions are filled automatically on the trading platform (like the stop loss, exit level, and the filling price), and the other trade that was part of the OCO order is canceled automatically as well. As you can see, there are multiple ways to use pending orders in a disciplined way, and most of the times a conservative approach is the way to succeed in Forex trading. Without discipline, traders are subject to emotional pitfalls that will be seen in the trading account over the long run.
Recommended Further Readings
- Why Trading with a Regulated Forex Broker?
– What is regulation for a brokerage house, why it is important, things to look for, how to check if the broker is telling the truth, etc.
- Benefits of Mobile Forex Trading
– Pros and Cons of mobile trading, highlighting the net benefits of it.
- Explaining Commissions in Forex Trading
– What type of Forex trading accounts are subject to paying commissions, what does it means and is this a good or a bad thing?
- Opening a Live Trading Account
– Steps to open a live trading account with a Forex broker, starting with the time taken for the whole process, documentation to be sent, verification process, trading platforms to download, etc.
- Why Trading with a Regulated Forex Broker?
Other Educational Materials
- “Importance of Technical and Fundamental Analysis in the Foreign Exchange Market.” Kadiri, Engr KO, and O. A. Alabi.
- A new hybrid model for intraday spot foreign exchange trading accounting for heavy tails and volatility clustering. Serbinenko, A., & Rachev, S. T. (2009). Journal of Computational Analysis and Applications, 12, 337-360.