Advantages and Disadvantages of Using Pending Orders

 

Hello there, this is tradingpedia.com and this video deals with pending orders, when and how to use them, advantages and disadvantages, why should we use pending orders, what types of pending orders exist, and anything that comes to mind relating to pending orders.

What Order to Use

A pending order signals, first of all, the existence of a trading plan, whatever your trading analysis would be. For instance, this is the EURUSD. Let’s assume that we are bullish as the market formed a bullish trend, but we are afraid to buy this dip in the current price action and we want to buy some strength – higher than the current market price – 1.1894. In order to do that, we can use a buy stop order, not a market order.

If we trade the EURUSD at market, we simply push By at Market or Sell at Market after we choose the volume. But we also have the possibility to use pending orders if we want to buy from higher levels or lower levels. Or to sell from lower levels or from higher levels.

Whenever you buy from higher levels, we need to place a pending buy stop order. If we want to buy from 1.1965 because the EURUSD reverses, we want to place a pending buy stop order at the highs to take advantage of that move. A pending order in the MetaTrader4 has no expiration – you have to cancel it. If you are not cancelling it, the MetaTrader4 will execute the order, should the price reach the entry level. If the price never reaches the level, the pending order remains active and it needs to be canceled.

If we want to buy from a higher level, we need to place a pending buy stop order. But let’s say that we are bearish and the move that started here is bearish, the start of a more aggressive move to the downside and we want to make the most of it. At this point, 1.1897 we see that it didn’t break the series of higher lows. Therefore, we want to sell from lower levels.

If we want to sell from a lower level, we want to place a sell stop order. What if we want to sell from higher levels? What if our analysis says, for instance, that this is a zigzag formation and this is a-b-c, the x-wave, next the a-b and then another segment higher, the c-wave? By the time the market makes a new high, we want to sell. In that case, we should place a pending sell limit order and such an order is at a higher level than the current market price.

On the other hand, if we want to buy a currency pair or any market if and when the market reaches a lower level than the current market price, we want to place a buy limit order, meaning that we buy from lower levels.

Pending Orders

These are the four trading types to use when trading financial markets with the MetaTrader4. Other ones exist, like the One-Cancels-Other. With this order, you may place a pending order above or below the current market, and if the market reaches one pending order, the other one gets canceled automatically. But such an order is not in the default settings, you need to integrate a new indicator on the platform – not that it is difficult to do so.

Therefore, keep in mind that if we want to buy from higher prices, we use buy stop orders, and when we want to buy from lower levels, we use buy limit orders. Whenever we want to sell from higher levels, we use sell limit orders, and sell stop orders when we want to sell from lower levels.

A buy stop order takes advantage of the market strength. A sell stop order takes advantage of the market’s weakness. All these four orders signal the existence of a money management, a trading plan. We want to go into the action only if the market reaches certain levels. This is very important because one of the major mistakes that the retail traders do is that because the market is open, they feel the need to do something. Well, sometimes the market just doesn’t move. In fact, it consolidates most of the time, not travelling all the time. Therefore, sitting on your hands is a position that you have on the market, in the sense that you are not willing to risk your capital if the market does not move.

If we place any one of these four pending orders and if the EURUSD spends the next 24h or days without reaching these levels, then effectively we spared the capital because the market did not go anywhere. So that is one advantage of pending orders – it signals money management in place, a trading plan and avoids wasting margin.

Another advantage is that by using pending orders you may influence the way you adjust the leverage and margin in the trading account. If we believe that the EURUSD will move above 1.20 and we place a pending order to buy 1.20 and then the market reverses, we have the opportunity to buy again but only if the market makes a new high with another pending order.

A disadvantage of pending orders is that they are often affected by slippage. Slippage happens when you have an active pending order and then an important economic news, like the NFP in the United States or any news with the potential of creating quick market activity comes and the broker executes your order with a slippage. For instance, if you want to sell from 1.1828 and place a sell stop order but the market falls so fast that the broker will execute the order only when there is a market available. And it may be 1.1825 or 1.1823, and the three pips difference represents the slippage and it is an important cost if you scalp your way in and out of the market for ten pips strategies or something like this.

Sum Up

To sum up, pending orders help a trader to mitigate the risk in a trading account and they are of two types – sell limit, sell stop, buy limit, buy stop. If you want to buy from higher levels, you use buy stop orders, if you want to sell from lower levels, you use sell stop levels. And it is always best to use pending orders in other to avoid spending margin and paying negative swaps as most currency pairs have negative swaps. We want to avoid being in a market that does not go anywhere by using pending orders.

Thank you for being here. Bye bye.