One of the first things you’ll need to learn about FX trading is the difference between instant orders and pending orders. You may need to initiate either of these types of order throughout your trading life, whether you’re trading independently or following forex signals.
Instant orders are forex orders that are immediately opened. They can be either a buy or a sell for any currency pair and they are initiated based on the current ask or bid prices. An instant order is often initiated by those who are currently tracking and analyzing their currency pair, but it requires a very good sense of timing on behalf of the trader.
BUY STOP = Order placed ABOVE price and keeps going UP
BUY LIMIT = Order placed BELOW price and price then goes up
SELL STOP = Order placed BELOW price and price keeps going DOWN
SELL LIMIT = Order placed ABOVE price and then goes DOWN
With instant orders, it’s always a good idea to have a stop loss in place; there are even traders who do not set take profits that will usually have either a stop loss or trailing stop. This is because the market can shift faster than the trader can react.
Not all forex orders will be immediately opened. Traders that are following forex signals or who have more sophisticated strategies will often put in trades that have more complex patterns and that are intended to initiate at a certain time.
On the popular MetaTrader 4 platform for instance, pending orders are initiated in nearly the same way as instant, they simply have additional requirements written in when defining the trade. Also, while an order is still pending, it can be modified as desired by the trader, or it can be canceled entirely without any penalty to the account.
Be sure to take note, that opening a pending trade order with a set price for buy or sell can skip a trade entirely, if those exact conditions aren’t met.
Here are a few definitions that you should know when dealing with pending orders:
- Good til cancel. A GTC order is any standing order that has conditionals, for instance a specific ask price. The GTC order will remain pending until that condition is met — and that condition may never be met. A GTC order’s benefits is that it’s highly specific: you’ll buy or sell the currency pair exactly when your conditions are right. It can be dangerous however because it will remain outstanding; a trader needs to do account management and be aware of their GTC trades so that they don’t risk accidentally overextending themselves.
- Stop orders. A stop order is a buy or sell trade that will initiate once the currency pair has reached its stop price. Stop orders are generally placed a certain amount away from the current market price so that the trader can pick up their trade at a specific point. Stop orders are a type of GTC trade as they will exist in pending until the stop price has been reached.
- Limit orders. A limit order is a buy or sell trade that initiates once the currency pair has reached its limit price; it is essentially the opposite of stop orders. Limit orders will operate as GTC trades until the limit price has been reached. Some traders have strategies for positioning limit prices and stop orders so that they can capture slightly more profit each trade.
- Take profit. A take profit is when the trade should actually capture profit. It is the price that the currency pair will need to reach for the trade to close. Setting a take profit is essential to many strategies; it ensures that the trader will not miss an opportunity (as the market does move quite fast) and it will make sure that they stick to their strategy. Without a set take profit, a trader may instead be tempted to let a trade ride in order to capture even more profit; this could result in the trade losing money instead.
- Stop loss. A stop loss is the counterpart to a take profit. A stop loss stops the trade once the market price has fallen to a certain amount. Stop losses are occasionally used instead of take profits in strategies. The benefits of the stop loss is the same as the take profit: it reduces the risk to the trader by ensuring that the trade is closed when it needs to. Many trades will use both a take profit and a stop loss to make sure that the trade does not linger too long in any single direction. Stop losses are generally placed fewer pips away from the current market price than the take profit, for obvious reasons.
- Trailing stop losses. A trailing stop loss is used in some advanced FX trading strategies and may be used in lieu of a take profit and a stop loss. A trailing stop loss essentially “trails” behind the current market price, making it so that the trade will close itself if the price falls too far from its current price; in other words, the stop loss changes to update itself on present market factors. A trailing stop loss that is set too close to market price can be dangerous, especially in times of volatility; it will close the trade quickly. Some traders will switch to a fairly lengthy trailing stop loss after they have already made a profit, to ensure that the trade doesn’t lose money, while still letting them potentially capture more in profit.
- Re-quoting. A trade may potentially switch from an instant trade to a re-quoted and pending trade, in the event that the trade initiated can no longer be filled based on the initial quote. This can happen for a variety of reasons: the volume may not be available or the price may have simply changed.
- Slippage. Slippage occurs when a trade is initiated but could not be filled at the actual requested price. There is a certain amount of slippage that can be considered tolerable even with the best market services. That being said, serious amounts of slippage can be used by less reputable markets, so traders should still be cautious about their slippage.
Which Type of Forex Order is for me?
Deciding whether to initiate a pending order or an instant order will depend on the trading strategy that you are using. Some traders initiate only instant orders because they are trading live; they are watching the market signals actively and deciding when they should buy or sell. While this is legitimate, it also requires a lot of attention and work; the trader simply cannot look away because the forex market operates too quickly. On the other hand, pending orders give a trader flexibility, the capability to strategize, and to plan their trading activity more accurately.
So, to round up…
Pending trade orders are what you should use if you want to initiate trades based on specific market prices. If you are using forex signals, looking to implement a trading strategy, this is the way to go.
Instant trade orders can be better suited to the more proactive trader — looking to trade based on current market price.
Choosing a type of forex order will depend on your own trading strategy, your risk tolerance, and ability to monitor the market.