What Is a Pending Order? 

A pending order is a type of order used in financial markets, including forex, that allows traders to pre-define the conditions for a trade’s execution, rather than having it executed immediately at the prevailing market price. 

In forex trading, novice traders often find themselves glued to their screens for days, waiting for the right entry points. However, many fail to consider the wisdom of buying or selling an asset immediately just because the current price looks attractive. 

There are many ways to simplify trading and reduce waiting time without sacrificing potential profit. One such method is a pending order. 

When placing a pending order, traders specify parameters such as price levels and time frames at which they want the order to be triggered. 

How Does a Pending Order Work? 

As the price of a security with a trailing stop loss rises, the trailing stop loss “trails” the price higher. When the price rise stops, the new stop loss price remains at the higher level it was trailed to, automatically protecting the investor from the downside while simultaneously locking in profits as the price reaches new highs. This service is often offered by online brokers at no additional charge. 

Types of Forex Orders  

When trading currency pairs, there are four types of pending orders. Each serves a distinct function and purpose, whether you are buying or selling. Pending orders can greatly enhance your trading in the Forex market, especially when you are not actively trading daily. 

Here are the four types of pending orders: 

• Buy Limit: A buy limit order executes a purchase at or below a specified price. This allows traders to control the entry price, avoiding potentially higher costs. 

• Buy Stop: A buy stop order triggers a purchase when the price reaches a predetermined level, usually above the current market price. While this may seem counterintuitive, the goal is to capitalize on upward price momentum. Additionally, buy stop orders can be used to protect against unlimited losses on uncovered short positions. 

• Sell Limit: A sell limit order executes a sale at or above a specified price. Traders use this to target a specific price level, aiming to secure potential profits or limit losses. 

• Sell Stop: A sell stop order is another type of pending sell order. However, it may turn into a market order upon execution, which may result in slippage (the difference between the expected price and the actual execution price). 

Trailing Stop 

A trailing stop loss order is a modified version of a standard stop loss order, set at a specified percentage or dollar amount away from the current market price of a security. For a long position, a trailing stop loss order is placed below the current market price. Conversely, for a short position, it is placed above the current market price. 

The purpose of a trailing stop loss order is to protect profits by allowing the trade to remain open and continue to participate in favorable price movements. The order will close the trade if the price reverses by a specified percentage or dollar amount. 

A trailing stop loss order is typically placed in conjunction with the initial trade, although it can be added after the trade is already open. 

Limit Orders Vs Stop Orders 

A limit order gives traders the right to buy or sell at a specified price or better. Conversely, a stop order triggers a market order, meaning that the trader will execute the order at the best price available in the market once the order is activated. 

Limit Orders: 

A limit order instructs your broker to buy or sell a security at a specified or more favorable price. For example, if you are looking to buy $100 worth of stock at $100 or less, you would place a limit order. This order will only be executed if the price reaches your specified target, or a better price becomes available. 

Similarly, a limit order can be used to sell a stock at a specified or higher price. For example, if you currently own a stock at $75 per share and want to sell when it reaches $80, you could place a limit order at $80. The order will only be executed at that price or better. 

Note that due to the more precise execution, brokers sometimes charge higher fees for limit orders. 

Stop Orders: 

Stop orders come in several forms, but they all act as conditional orders based on a price that is not currently available in the market. When this predetermined price is reached, the market order is automatically triggered. 

Many brokers now use the term “stop on quote” to explain that the stop order will only be activated when the valid quoted market price is met. 

For example, a stop order with a stop price of $100 will only be triggered if the market reaches $100 or better. 

Other Forex Orders 

Beyond Trailing Stop Orders and Pending Orders in Forex, traders also use market orders, Stop Loss and Take Profit Orders. A thorough understanding of these order types and their nuances is crucial for any participant in the currency market before starting to trade Forex. These orders serve various functions, from entering a trade to protecting profits and mitigating risk. 

• Market Orders 

Market orders represent the simplest type of order in Forex and other financial markets. The broker executes a buy or sell trade at the best available market price prevailing through the trading platform.  

These orders are categorized as follows: 

Buy Market Order: Executes a trade at the best available buy price. 

Sell Market Order: Executes a trade at the best available sell price. 

Close Order: Used to exit an existing trade. This would be a sell order if the original trade was a buy, and a buy order if the original trade was a sell. 

• Stop Loss and Take Profit Orders 

Critical exit orders include Take Profit and Stop Loss orders. 

– Take Profit Order: A pending order designed to close an open trade at a predetermined price to lock in profits. For buy positions, this order is placed above the current market price; for sell positions, it is placed below. 

– Stop Loss Order: A pending order intended to close an open trade at a specified price to limit potential losses. For buy positions, it is set at a level below the current market price; for sell positions, it is set at a higher level. 

Stop-loss and take-profit orders are essential risk management tools in trading. While stop-loss orders help prevent excessive losses by exiting a position when the market moves against the trader, take-profit orders allow traders to lock in profits once the market reaches a favorable level. These orders work best when set in accordance with the trader’s strategy and market analysis, allowing for a disciplined approach to trading. Executing these orders can enhance a trader’s discipline, ensuring that they stick to their trading plan and avoid making emotional decisions during high-pressure situations. 

Time-in-Force (TIF) Orders 

Time in force is a guideline set by the trader to determine how long a trade will remain active (or “in force”) before it expires. Options traders and other active traders can set an appropriate expiration date for their trades to help prevent unintended executions. 

Without an expiration date, an order could be executed at an inopportune time or price, especially in fast-moving markets. This is especially important for investors who use day trading strategies and take advantage of volatile market conditions where prices fluctuate rapidly. 

Basics of Time in Force 

Before placing a time-in-forcec stock order, it is important to fully understand its mechanics. Just as with options trading terminology, familiarity with the language used to describe time-in-force orders is essential. 

Why Use TIF Orders? 

Time-in-Force (TIF) orders provide traders with the flexibility to adapt to dynamic market conditions. These order instructions specify the length of time a broker must attempt to execute an order. By effectively utilizing TIF orders, traders can ensure that their orders remain active and eligible for execution only until a pre-determined point, effectively mitigating the risk of holding a position that becomes unprofitable. This can be particularly useful in volatile markets where prices can fluctuate rapidly. For example, a trader might use a Good ‘Til Cancelled (GTC) order for a long-term strategy, keeping the order open indefinitely until it is executed or cancelled. Conversely, a day order will automatically expire at the end of the trading day, preventing the trader from being exposed to overnight risk. Other TIF options, such as Immediate-or-Cancel (IOC) or Fill-or-Kill (FOK), provide more granular control, allowing traders to take advantage of specific price movements while limiting their exposure. Choosing the right TIF order type is crucial to effectively managing risk and maximizing trading opportunities. 

Conditional Orders 

A conditional order is an order that is conditional on one or more specific criteria. In general, conditional orders include more complex order types used in advanced trading strategies. The most common type of conditional order is a limit order, which specifies a fixed price above (for a buy order) or below (for a sell order) at which the transaction cannot take place. However, conditions beyond the price can also be incorporated, such as the duration of the order’s validity (known as time-in-force), or a requirement that another order must be completed before the new order is activated. 

How long does a pending order take? 

• One frequently asked question is how long a pending order will remain open. This depends entirely on whether the price of the asset reaches the specified level. For example, if you place a stop-sell order at $5 for a stock that is currently trading at $6, the order will only be executed if the stock price drops to $5. 

• However, it is often wise to set a time frame for the pending order to be valid. As a day trader, you may ask your broker to cancel the pending order if it is not executed by the end of the trading day. 

• Once a pending order is executed and becomes a live trade, it will remain open until it reaches the stop loss or take profit level, you close it manually, or it is closed due to a margin call. 

Pros and Cons of Pending Orders 

No time wasting: One of the biggest advantages of pending orders is the time they save. You don’t need to constantly monitor the market to know your desired entry price. For example, if you expect a buy position at the 50% Fibonacci retracement level, you can simply set a pending order and pull back. The trade will be executed automatically if the price reaches your target. 

• Prevent slippage: Pending orders can also help mitigate slippage. While slippage can occur with both market and pending orders, it is generally less common with pending orders, especially in less volatile market conditions. 

• Miss good Trades: However, pending orders also have their drawbacks. You may miss out on potentially profitable trades by a small margin. For example, if you place a buy stop order at $10.50, the price may reach $10.60 and then reverse. In this scenario, your analysis may be correct, but the small price difference may cause you to miss out on the opportunity.