Learning All Types Of Orders - Buy, Sell, Buy Stop, Sell Stop, Buy Limit, Sell limit
- What Is A Market Order?
- What Is A Pending Order?
- Limit Orders
- What Is A Buy Limit?
- What Is A Sell Limit?
- Stop Entry Orders
- What Is A Buy Stop?
- What Is A Sell Stop?
- How To Set A Pending Order
- What Is A Trailing Stop?
- How To Set A Trailing Stop
- Is It Best To Use Limit Orders Or Stop Orders?
- Potential Downsides To Pending Orders
- Key Points From This Chapter
In this guide part, you will learn the different types of market orders available to the Forex trader. An order is when you instruct your broker to open or close a trade in the market. You can pre-define your entry and exit points. So, let's look at the different orders available to you.
You may or may not feel inclined to use pending orders in your Forex trading. It's an individual choice. At the end of this guide part, you will be able to make an informed decision as to whether pending orders suit your trading style.
What Is A Market Order?
A market order is an instant order taken at best available current market price with your broker.
For example, The Bid (Buy) price for GBPJPY is currently at 1.4488, and the Ask (sell) price is 1.4490. If you want to buy GBPJPY, the market price from your broker is 1.4490. You place your order, and the trade opens immediately on your trading platform. Bear in mind the Forex market moves fast. Even though you bought at 1.4490, the price could be slightly higher or lower when the trade is accepted.
All market orders then are trades which go live as soon as the broker accepts your order. You can preset your stop loss and take profit before taking the trade or do it once the trade has been placed.
What Is A Pending Order?
A pending order executes at a point in the future, at a price which you specify. You may be watching GBPJPY at 1.4480 and interested in a support level below at 1.4380. This area is where you might like to place an order. But you have to go to work, go shopping or feed the cat, so you can't sit and wait for the price to hit. So, before you head off to work, you place a pending order with your broker and look forward to coming home to see if it was triggered whilst you were away. With experience, pending orders can prove to be a useful tool for your Forex trading success.
There are a few different types of pending orders, which we will cover below.
A limit order is a pending trade you either BUY below the market price or SELL above the market price. This pending order is to buy or sell once the market reaches your predetermined price area.
What Is A Buy Limit?
Your order activates to buy at or below your specified price. In the example of GBPJPY, the market price hits 1.4380 and triggers your pending order. The thinking behind your buy limit order is you expect the price to bounce off support and rise. You now have a live buy trade in the market.
What Is A Sell Limit?
Your order activates to sell above your specified price. In this case, you are watching GBPJPY, waiting for it to hit resistance at 1.4555. You have set your sell limit to trigger at that price. When it does, your expectation is for the price to fall. You now have a live sell trade in the market
Stop Entry Orders
A stop entry stops your order from executing until the market price hits this stop price. Yes, we know it doesn't sound obvious. Imagine GBPJPY has been in an upward trend for a while. Your analysis shows you a probability that price may keep on going up to a certain resistance level. You want to catch the wave of the trend, so you set a stop order.
What Is A Buy Stop?
For instance, the GBPJPY price is at 1.4010 and is showing strong momentum. But it's stuck at a support level, and you want to see price making a move up before you get into a buy trade. You set your buy stop at 1.4050. When it reaches this price, your pending order – the buy stop – is triggered, and you now have a live BUY trade in the market.
As an example, you may have set your stop loss to 1.3980 and your target profit to 1.4480.
A buy stop is an order that anticipates the market price rising to buy into the move upwards. Your pending order is AHEAD of the price action.
If the price doesn't hit your buy stop, you can cancel your order with your broker and wait for another opportunity to enter the market.
What Is A Sell Stop?
The price of GDPJPY has now pushed through support at 1.4000. It moved to 1.3950 and then reversed back to 1.4000. Now it cannot seem to get above that level.
This retouch of support could be a pullback (We will cover pullback strategies in chapter 16). You believe that the upward trend could be reversing and you decide you'd like to get it on that momentum down. But you want to be sure. To cover your options, you place a pending order for a sell stop at 1.3950.
If the trade stays above support and continues the upward trend, your sell stop won't activate. As you observe price pulling upwards, you can cancel the pending order and go back to your market analysis.
But if the market price starts to head on down, your sell stop is triggered. All being well, the price will continue to head downwards until it hits the target price you preset in your pending order, which is AHEAD of the sell.
How To Set A Pending Order
- Open a new order – not one-click trading – and select pending.
- Enter what type of pending order you need – buy limit, sell limit, sell stop or buy stop.
- Choose your entry price.
- Finally, set your stop loss and take profit price and place the order
What Is A Trailing Stop?
There are arguments for and against trailing stops. On the one hand, it's a way of locking in profits. But, on the other hand, it can limit your gains as the market pauses, breathes and pulls back to your trailing stop.
A trailing stop can be applied when your trade is moving into profit. Imagine GBPJPY is now 50 pips in profit. You can set a trailing stop loss to 50 pips. You had a 50 pip stop loss already in place, so you are now at breakeven. If price pulls back 50 pips you are out of the trade with no profit, but no loss.
Imagine you are in a buy trade. You have set a 50 pip trailing loss, which now follows the price. So, your trade moves into a 70 pip profit. If price pulls back, you are out of the trade for a 20 pip profit.
A trailing loss always moves forward with the trade. If price pulls back, the trailing stop loss stays put. It doesn't retreat with the price. It won't move again until price moves ahead of where it was when it pulled back.
How To Set A Trailing Stop
- Right-click on the open order
- Select trailing stop
- Select custom
- Enter the number of pips you want to trail
It's worth noting on the MT4 app that the trailing stop shows as points. Fifty points are ONLY 5 pips. To change this, click on custom and set it to 500, which is 50 pips. For 20 pips set it to 200, and so on.
Effectively, a trailing stop loss is a moving stop loss. The pros are it's excellent for locking in a profit. The cons are, the trailing stop gets hit, and then the price continues on the way it had initially been going, meaning you missed out on potentially more profits.
If you plan to use a trailing stop, give the trade some room, mainly for swing trading or day trading. For scalping, a trailing stop loss doesn't need as much space as you are in and out of the market super fast.
Is It Best To Use Limit Orders Or Stop Orders?
It's easy for new traders to get confused between the two options. Both orders allow you to specify an entry and exit point. But the difference is in the purpose of the trade.
In simple terms, a Buy limit means you are assuming the price will continue in the same direction AFTER it has reversed. For example, GBPJPY is at 1.4450 and moves down to your BUY limit at 1.4400. Price then heads on back up, confirming your analysis for a buy.
A Buy stop means you set your pending order ABOVE current price, with the idea that it will continue to move upwards if your BUY stop is triggered. Your trade activates at that price and continues to move upwards.
A Sell limit means you assume the price will continue to trend downwards after it has pulled back to your pending order. GBPJPY is at 1.4500. You see signs of price coming down, so you set a sell limit at 1.4450. The price drops and activates your pending order and continues to move down.
A Sell Stop means you place your pending order underneath the price action. The price triggers your sell stop and continues to trend downwards. Your assumption for this pending order is that selling pressure will continue.
Potential Downsides To Pending Orders
Quite often, price doesn't do as we wish. The Forex market can be fickle and appear to do unexpected things. Even on a support or resistance area, the price may spike against the trend before it carries on in the initial direction. This price action can be confusing for a novice trader. But the more time you spend in the market, the more you'll see these movements are not unusual. Why do you think this happens? It's simple. Price spikes trigger stop losses, taking novice retail traders out of the market.
For instance, GBPJPY breaks through support at 1.4400. Now, novice traders worldwide are looking at the charts thinking the upward trend is reversing. And they want in on it. Price drops 50 – 80 pips and momentum looks strong. Thousands of novice traders had pending stop orders set at 1.4370 because they believe the sell is happening. They thought they were safe, setting a sell stop order way below support. The big red candles stimulated them into action. After the price spike, GBPJPY turns around, cruises back through the support zone and continues into the upward trend.
This activity is a typical move in the Forex market.
The moral of the story is, learn how the market works before you start setting pending orders. When you understand price action and how the big boys manipulate price, you are ahead of the game and can make better use of pending orders.
That said, if you decide never to use them, this is acceptable too.
Key Points From This Chapter
- A Buy Stop opens a long (buy) position at a price higher than the current price.
- A Sell Stop opens a short (sell) position at a price lower than the current price.
- A Buy Limit opens a long (buy) positions at a price lower than the current price
- A Sell Limit opens a short (sell) position at a price higher than the current price
- A Trailing Stop is a stop loss that follows price movement. You determine the level.
- Be aware of market price spikes set to confuse retail traders.
- Keep your trading simple.
Make sure you grasp the concepts of pending orders and play around with them in a demo account. On a live trading account, you may incur rollover fees. So check with your broker what these fees are.
Pending orders can be a useful tool, especially if you are time-strapped and cannot be at the charts as much as you would like.
The one golden rule for Forex is to keep it simple. Pending orders do work well with experience. But, it's crucial to reduce the possibility of feeling overwhelmed with information.
In the next chapter, you will learn what is a stop loss and take profit. And you will discover best practices for where to set stop losses and profit targets.