Pending orders Buy Stop and Sell Stop are very dangerous types of orders in the forex market. Once you've mastered the combination of chart analysis and the use of these specific types of orders, you can gain immense benefits when trading forex. In the article below, we not only help you understand what the Buy Stop / Sell Stop order is but also give examples and practical trading instructions effectively.
What is a pending order or a Pending Order?
As you know, forex trading we will have to place buy or sell orders. There are 2 types of input commands:
- Type 1: Market Execution
- Type 2: Pending Order
Direct placing is the most basic method of placing an order that anyone participating in forex trading knows. Ie your order will be matched immediately with the current market price. You see the exchange listed price, which is the entry price and used to calculate profit and loss.
Conversely, for a pending order, as the name implies, you will have to wait a while for the order to be filled when the conditions you specify are met. But why wait and wait until when? Read on for our examples below to get a better picture!
There are 4 common types of pending orders: Buy Stop, Sell Stop, Buy Limit and Sell Limit. In the context of this article, we will introduce the Buy Stop and Sell Stop orders. The rest of the Buy Limit and Sell Limit will be introduced in the next article.
What is a Buy Stop pending order? Why use Buy Stop orders?
Buy Stop pending orders are a very effective tool in a breakout strategy. Accordingly, the price you buy will usually be higher than the current price. Sounds weird right? Who wants to buy more than the market price?
You certainly do not misread. You will understand why we say that after looking at this example: Suppose two days have passed but the main EURUSD currency pair is still moving sideways in the price zone of 1.0030 - 1.0050. No trend has been created, and you're fed up with this gloom, it's hard to make money in such a gloomy market.
However, the special thing is that you believe that only EURUSD can rise and break out of that trading range, the uptrend will explode strongly. What do you do in this situation? Are you going to sit in front of the screen 24/24 to wait and see when the currency pair increases to press the order button? Of course not!
This is the ideal time for Buy Stop orders to show their strength. What you need to do is place a Buy Stop order at 1.0060 price. If EURUSD goes up and hits the 1.0060 mark, the exchange will immediately place a buy order and you have a chance to catch the sharp rally. You can enter commands even while sleeping or even when the internet connection is lost. Conversely, if the pair continues to move sideways and is unable to rise to the price you had placed on the Buy Stop, the order will not match and you will not assume any risk of losing any money.
Here is an example of a Buy Stop order:
In the illustration above, imagine the blue / red chart part is the chart up to now and the gray part is what may happen in the "future". Buy Stop orders will be placed above the current price, if the market rises and touches the previous set price, a buy order will be triggered.
What is a pending order?
Similar to Buy Stop, Sell Stop pending orders are also a very effective tool in a breakout trading strategy. Sell Stop is a type of order placed with a price below the current price. Your account will automatically enter a sell order if the market falls and touch a price you set.
If you understand the characteristics of the Buy Stop order, you will easily imagine the Sell Stop order. Suppose GBPUSD has moved in a range of 1.3010 - 1.3030 for a long time. Of course, entering orders at these prices will be detrimental because the price does not move much. Therefore, you want to wait for GBPUSD to cross support and resistance levels, penetrate the 1.3000 level to confirm the explosive downtrend.
From that analysis, you can place a Sell Stop order at 1.3000. If GBPUSD drops to 1.3000, the sell order is immediately triggered and you have a chance to grasp the trend as soon as it forms.
Conversely, in the event that GBP does not fall as expected, the order cannot be executed and you will not be exposed to any risk of losing money.
Here is an example of a Sell Stop order:
In the illustration above, imagine the blue / red chart section is what happens so far and the gray part is what happens in the "future". Sell Stop order will be placed below the current price, if the market falls and touches the price we set earlier, the sell order will be triggered.
Advantages of pending orders Buy Stop / Sell Stop
Here are the advantages of Buy Stop / Sell Stop pending orders compared to market orders or Limit orders:
- Buy Stop / Sell Stop helps you "go down the wind": If the market rises, you buy. If the market goes down, you sell. Thus helping you keep pace with market movements.
- Buy Stop / Sell Stop can be used for trading on news. As you know, when the market releases important news, the prices of very strong pairs can go up to a hundred pips within a short period of time. Therefore, one way of trading that traders use at the time of news is to place a Buy Stop order above the current price by 20 pips for example and a Sell Stop order below the current price by 20 pips for example. After the news, if the price increases by 50 pips, the Buy Stop order will match your profit of 30 pips (50 - 20). What if the price drops by 50? No problem, the Buy Stop command above does not match but the Sell Stop command below will match and you can also make a profit of 30 pips. However, this strategy requires you to have a lot of experience because there are cases where the price can be swept up and then swept down both sides after the news.
Buy Stop / Sell Stop orders also have their own disadvantages:
- Through the introduction above, you probably understand the Buy Stop order to help you "buy higher and sell higher to make profit" while the Sell Stop order helps you to "sell at a lower price and close a lower position to make a profit." word". These two orders are significantly different from the Buy Limit / Sell Limit orders that help you to "buy low and sell high". Therefore, you usually only achieve high profits when using Buy Stop / Sell Stop in case the market has strong moves.
How to place a Buy Stop / Sell Stop order on MT4
How to place Buy Stop and Sell Stop orders on MT4 / MT5 is extremely simple. You can follow these steps:
Step 1: After analyzing the chart on MT4, press "F9" or click "New Order" on the toolbar to open the order dialog box. In the "Type" section, select "Pending Order"
Step 2: After selecting "Pending Order", a dialog box will appear adding an area where you can select one of four types of pending orders. Here you choose Buy Stop or Sell Stop. Then enter the activation price in the "at price" section. Expiry is the expiry time, if after this time your order does not match, it will be canceled.
Step 3: Check the information of currency pair, stop loss, take profit, trigger price, then click "Place"
Instruction for using pending orders Buy Stop / Sell Stop
With the Buy Stop / Sell Stop orders, we can catch the trends that are forming in the market. The usage of Buy Stop / Sell Stop details is very diverse and depends on the forex trading strategy you use. Usually, traders use these two commands when analyzing candlestick patterns, price patterns or analysis of support and resistance areas.
Here we give an example of how to effectively use trading strategies with Buy Stop / Sell Stop orders as follows:
As you can see in the chart above, the price is moving in a Triangle pattern. In theory, if the price breaks above the upper edge of the triangle, the market is likely to rise. Conversely, if the price breaks below the lower edge of the triangle, the market is likely to fall. So to trade with this Triangle pattern, we can place a Buy Stop order above the triangle model and place a Sell Stop order below the model. If the price rises and hits the set level, the Buy order will be triggered and you will have the opportunity to follow a new rally. Otherwise, if the price falls, the Sell order will be triggered and a new round of discounts is waiting for you.
Buy Stop and Sell Stop orders are two very useful types of forex trading that help you keep abreast of the latest price movements. However, always remember that no matter how you enter the order, you need to set a reasonable stop loss and take profit, and follow the risk management strategies. Good luck!
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Author: Tin Nguyen
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