Trading is buying and selling, how these operations are carried out, and the timing is what distinguishes a good trader from a rookie. The basic operations executed by traders can be classified into two main types: Market orders and pending orders.
The correct use of these order types gives us better entries and exits to obtain greater profits and limit losses. For this reason, we must understand what they both consist of. Once we understand what each type of order consists of, we will know how to use them in our favour and decide which one to use in each situation.
Market orders
These are the most basic types of orders. They consist of buying or selling at the moment trader decides to.
Market orders are instructions given to your forex broker to enter or exit a trade at the specified time and with the best available price. This way, the order depends on the volume of the trade you decide to make, so the platform will ignore the price at which the trade is made. In a fast-changing market, the problem may be the variations between the price when the trader makes the market order and the price at which the order is completed. Hence, this type of order can lead to winning or losing some pips.
The risk in market orders is that because they depend mainly on the volume of the transaction that the trader wants to make, the final value of the pip may be very far from the initial level at which he wanted to buy. For example, if a trader wants to buy EUR/USD with $1000 at a pip level of 1.1756 but can only exchange $500 at that level of pip, the rest will be filled automatically with the best offers available in the market. In this way, it is more likely that he will end up exchanging the remaining $500 for a higher value than the initial $ 1.1756
The biggest pro is the speed of execution, while the greatest downside is the final price at which the order is filled. As a result, market orders are best suited for long-term investments or long-term swing positions. They are not suitable for active trading entries or exit, low-volume trading, and premarket or after hours.
Pending Orders
Pending orders are a set of instructions given to the broker to enter or exit a position. At its most basic level, a scenario is monitored, and the trader establishes a price at which the broker must enter or exit the position automatically.
There are two basic types of pending orders, these are limit orders and stop orders.
Limit Orders
There are two types of limit orders: Buy limit and Sell limit.
Limit orders execute the desired operation once the market price reaches the established limit.
Buy Limit orders: In this case, for the action to be executed, the price must be equal to or lower than the one established by the trader. Here the trader is looking to take advantage of the low price, expecting that later it will rise.
Sell Limit: For this action to be executed, the price must be equal to or greater than the one established by the trader. Here the trader thinks that the price is at its highest point and it's time to get the most profit out of it.
Here is an example of a Buy Limit Order. Here the trader expects the price to plummet, so he set the buy limit to automatically buy to the established price and below
This means that if the trader places a Buy Limit order at a pip level of 132.69, this order will be triggered when the pip level drops to 132.69 or even better at a lower price.
With limit orders, the price slippage that occurs with market orders is avoided.
Stop Orders
They are a set of instructions given to the broker to enter or exit a position after the price crosses a limit defined by us.
Stop orders activate a Market order when it reaches a price level defined by us. Thus, it can be thought of as a conditional market activated when reaching the established levels.
These orders are also called Stop loss orders because they prevent the trader from losing a greater amount of money when the market moves in a direction contrary to what he expected.
There are two types of Stop orders: Buy Stop and Sell Stop.
Buy Stop: This order activates a buy market order when the set price is reached.
Sell Stop: This order activates a sell market order when the price is reached by the market. Both orders are executed at the best available price and depend on market liquidity.
Here is an example of a sell stop order. After the price crashed, the trader was not willing to lose more money and decides to sell.
Although there are many advantages to pending orders, there are some disadvantages that must be considered. For instance, an order may never be executed because the requirements to activate the purchase or sale may never be met. For example, suppose a value of 7.08 is established for a certain pair because the level must be exactly 7.08. In that case, if the pip falls even to 7.09, the purchase action will not be executed, and the trader would lose this opportunity.
This tells us that although it is a great advantage to know how to use pending orders, the trader must constantly study the market and monitor its actions.
In Summary
Even after considering the advantage that we get from the immediacy of market orders, the risks of buying at higher prices and selling at lower prices are probably not justified in daily trading. For this reason, a good trader must fully master pending orders so that he can design a winning strategy
The reasons pending orders are better than market orders are:
Less screen time: a trader who knows how to use pending orders and adapts them to his trading strategy will have to spend much less time in front of the screens because the programmed instructions will do the job while he enjoys more free time
Easier to use Phone: One of the greatest attractions of the current trading world is the ease of access to the markets from any device. However, we know that nobody wants to spend hours and hours monitoring the market on a screen as small as the one on the phone. When using pending orders properly, it is not difficult to enter a few times to program limit and stop orders from your phone.
Discipline: This is possibly the biggest key to any trader's success. It takes experience to separate strategies from emotions, and this is much more difficult if you are in front of the screen seeing how the market reacts at all times.
After analyzing the above, it is concluded that pending orders are much more convenient for trading than Market orders.
Let's get you started
Receive the BSF Trade Manager To Help You Practise Better RIsk Management.
