If you are a forex trader, then you understand the importance of timing when it comes to executing trades. However, there are situations where you may not be able to execute a trade immediately, either because the market conditions are not favorable or you are not available to monitor your trades. This is where pending orders come in. In this article, we will explore the concept of forex pending orders and how to use them effectively.
What are Forex Pending Orders?
A pending order is a request made by a trader to execute a trade at a specified price in the future. Pending orders are used to automate trades and can be placed when a trader is not available to monitor the market or wants to take advantage of a specific market condition.
Pending orders can be placed in two ways:
Buy Limit and Sell Limit Orders
A buy limit order is a pending order to buy an asset at a price lower than the current market price. A sell limit order is a pending order to sell an asset at a price higher than the current market price.
For example, let’s say the current market price of EUR/USD is 1.2000. If you believe that the price of EUR/USD will fall to 1.1900 before it starts to rise again, you can place a buy limit order at 1.1900. This means that if the price of EUR/USD falls to 1.1900, your trade will be executed automatically, and you will be long on EUR/USD.
Similarly, if you believe that the price of EUR/USD will rise to 1.2100 before it starts to fall again, you can place a sell limit order at 1.2100. This means that if the price of EUR/USD rises to 1.2100, your trade will be executed automatically, and you will be short on EUR/USD.
Buy Stop and Sell Stop Orders
A buy stop order is a pending order to buy an asset at a price higher than the current market price. A sell stop order is a pending order to sell an asset at a price lower than the current market price.
For example, let’s say the current market price of EUR/USD is 1.2000. If you believe that the price of EUR/USD will continue to rise if it breaks through the resistance level at 1.2050, you can place a buy stop order at 1.2050. This means that if the price of EUR/USD rises to 1.2050, your trade will be executed automatically, and you will be long on EUR/USD.
Similarly, if you believe that the price of EUR/USD will continue to fall if it breaks through the support level at 1.1950, you can place a sell stop order at 1.1950. This means that if the price of EUR/USD falls to 1.1950, your trade will be executed automatically, and you will be short on EUR/USD.
Advantages of Using Pending Orders
Removes Emotional Trading
One of the biggest advantages of using pending orders is that it removes the emotional aspect of trading. When you place a pending order, you have already decided on the price at which you want to enter or exit the market. This means that you will not be tempted to make impulsive trades based on emotions.
Provides Flexibility
Pending orders allow traders to be flexible and not be constrained by the time or availability to monitor the market. A trader can set a pending order to execute at any time, and it will be executed automatically when the market reaches the specified price.
Helps Manage Risk
Pending orders can help manage risk by allowing traders to enter or exit the market at a predetermined price. This means that traders can set stop-loss orders to limit their losses and take-profit orders to secure their profits. By using pending orders, traders can ensure that they are not caught in a losing position if the market suddenly turns against them.
Saves Time
Another advantage of using pending orders is that it saves time. Instead of constantly monitoring the market, traders can set pending orders and let the market come to them. This frees up time for traders to focus on other aspects of their trading strategy.
Disadvantages of Using Pending Orders
No Guarantee of Execution
One of the biggest disadvantages of using pending orders is that there is no guarantee of execution. If the market does not reach the specified price, the order will not be executed. This can be frustrating for traders who have missed out on potential profits because their orders were not executed.
Market Volatility
Market volatility can also be a disadvantage when using pending orders. If the market moves too quickly, it may skip over the specified price, causing the order to be left unfilled. In some cases, the market may even move in the opposite direction, causing the trader to enter into a losing position.
Timing
Timing is also an important factor to consider when using pending orders. Traders must make sure that their orders are not placed too close to important economic events or news releases that can cause significant market volatility. Failure to do so can result in large losses.
Tips for Using Pending Orders Effectively
Choose the Right Type of Order
Choosing the right type of pending order is critical for successful trading. Traders must analyze market conditions and use technical analysis to determine the best type of order to use. A buy limit order may be appropriate if the market is in a downtrend, while a sell stop order may be suitable if the market is in an uptrend.
Set Realistic Prices
Traders must also set realistic prices for their pending orders. Setting prices too close to the current market price can result in the order not being executed, while setting prices too far away can increase the risk of losses.
Monitor the Market
Traders must monitor the market to ensure that their pending orders are still valid. Market conditions can change quickly, and a pending order that was valid yesterday may not be valid today.
Use Stop-Loss and Take-Profit Orders
Traders must also use stop-loss and take-profit orders to manage risk and secure profits. Stop-loss orders can limit losses if the market moves against the trader, while take-profit orders can secure profits if the market moves in the trader’s favor.
Conclusion
In conclusion, pending orders can be a valuable tool for forex traders. They can help remove emotional trading, provide flexibility, help manage risk, and save time. However, traders must also be aware of the disadvantages of using pending orders and must use them effectively by choosing the right type of order, setting realistic prices, monitoring the market, and using stop-loss and take-profit orders. By doing so, traders can increase their chances of success in the forex market.
Self-confessed Forex Geek spending my days researching and testing everything forex related. I have many years of experience in the forex industry having reviewed thousands of forex robots, brokers, strategies, courses and more. I share my knowledge with you for free to help you learn more about the crazy world of forex trading! Read more about me.
