When a trader has an investment idea, a position will have to be opened. The types of orders can be divided into two categories – market orders and pending orders.

The market order is executed instantly at the bid and ask prices that the broker displays. Accordingly, when the trader buys the order will be executed at the offer price and when he sells – at the bid price.

However, the actual position opening will not always occur at the price displayed. Prices are constantly changing. It takes some time from pressing the mouse button to the actual conclusion of the transaction. In this interval, the quotes may change again. This is especially true during periods of increased volatility (e.g., around the disclosure of important information) when price changes are abrupt.

Pending orders are placed away from current bid/ask prices for future execution. If the quotes do not reach the price of the order, it will not be executed. Thus, compared to market orders, pending orders provide greater certainty about the execution price but uncertainty about position opening.

During periods of high volatility, it is possible that prices will change in large intervals (slippage) and order execution will occur at less favorable levels.

One of the most popular platforms for retail trading MetaTrader4 offers the following types of orders:

  • For instant execution (market orders)
    • Buy (executed at ask price)
    • Sell (executed at bid price)
  • For deferred execution (pending orders)
    • Buy-stop (a buy is executed at a price above the current one)
    • Buy-limit (a buy is executed at a price below the current one)
    • Sell-stop (a sell is executed at a price below the current one)
    • Sell-limit (a sell is executed at a price above the current one)
Pending Orders. Source: MetaTrader4

Pending Orders. Source: MetaTrader4

Orders may be accompanied by other orders attached to them – most often for the purpose of taking a profit or limiting a loss. Apart from their purpose (buy/sell), orders may satisfy other criteria – such as time (valid until the end of the day).

Let’s look at an example:

EUR/USD trades at 1.1500 (1 euro is exchanged for 1.15 dollars). For a reason, we believe that if the pair reaches levels of 1.1400, this downtrend will continue to 1.1200. In this scenario, we would look to open a short position (sell) at 1.1400 with price target of 1.1200 (200 pips = 1.1400-1.1200). This means placing a sell-stop order at 1.1400 with an attached take profit order at 1.1200. It is wise to limit potential losses with an attached stop-loss order.

Let’s look at another scenario. The current quotes are 1.1500. We believe that a possible fall to 1.14 will be a turning point, from which EUR/USD will rise to 1.1700. In this case, we will place our buy-limit order at 1.1400 with an attached take profit order at 1.1700 (for a profit of 300 pips = 1.1700-1.1400). Placing a stop-loss order to this position is recommended us usual.

Placing the right type of orders is a challenge for novice traders. Trading on a demo account makes it easier to quickly gain experience with order management.

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