Trading in the financial markets includes buying and selling financial instruments but is not limited to opening or closing a position only at the moment.
In fact, in addition to market orders which are designed to execute our trades immediately, there are other types of orders to automate our trading strategies in the future without the need to monitor the market constantly.
These orders include limit orders, stop orders, buy stop limit orders, and sell stop limit orders, which we’ll go through them below.
What Are Limit Orders?
There are two types of limit orders, including buy limit and sell limit, explained below.
Buy Limit Orders
Buy limit orders refer to placing an order with a broker or exchange to buy a security at or below a specified price.
This means that a trader believes that the price reaches a support level and then changes its trend so that he can make a profit.
Assuming that the current price level of EUR/USD is 1.20 and a trader wants to buy EUR/USD only if the exchange rate reaches the level of 1.15. So he needs to place a limit order to buy 10,000 EUR at a limit price of 1.15 EUR/USD.
If the current market rate reaches 1.15 EUR/USD, the order will be executed, and if the downtrend changes to an uptrend, the trader makes a profit.
However, if the exchange rate reaches 1.15 EUR/USD and the downtrend lasts, he loses profit.
Sell Limit Orders
Sell limit orders act the opposite of buy limit orders and are placed by a trader with a broker or exchange to sell a security at or above a specified price.
To better grasp, imagine a trader owning a stock XYZ currently trading at $50, and he decides to sell his shares if the prices increase to $70 per share.
Therefore, he places a sell limit order to sell his shares and save his profits, which will be executed if the price reaches $70 or higher.
What Are Stop Orders?
Stop orders refer to placing an order to buy any financial instruments at a higher price or sell them at a lower certain price.
Similar to limit orders, stop orders are also categorized into two types: buy-stop orders and sell-stop orders.
Buy Stop Orders
Buy stop order occurs when a trader places an order with a broker or exchange to buy a security once the market price reaches a higher level, with the expectation that the uptrend will continue to last.
For example, a trader would decide to buy 50 shares of Apple company, but only if the price rises to $60 per share or higher.
If the stock price rises to $60 or higher, the broker will execute the order at the market price, which may be higher than the stop price.
Sell Stop Orders
Sell Stop orders are placed when a trader believes that the price breaks a certain level in its downward trend, and it also has the potential to continue its downward trend. Therefore, he should place his order at a lower price than the current market price, and if the price reaches that point, his order will be completed.
In this case, if his prediction comes true and the downward trend continues, he will benefit from the further price drop, and if the trend is upward, he will lose.
We’ve learned about four different pending orders so far, which are used in MetaTrader 4, a trading platform used by tons of traders and brokers.
However, MetaTrader 5 introduces two more additional pending order types, buy stop limit and sell stop limit orders, which we’ll take a look at them below.
Buy Stop Limit Order
Buy stop limit order is executed in two parts, including stop order and the limit order, respectively.
In other words, to place a buy-stop order, first, we need to place a stop order which is the price at which the order is triggered to start.
Once the stop price is reached, the order becomes a limit order, which is the maximum price that we are willing to pay.
Let’s say a trader wants to purchase a stock at $40 only if the price touches $60 first and the current price is $30.
That’s where buy-stop limit orders come handy since a trader will be able to place a buy-stop limit order with a stop price of $60 and a limit price of $40.
This means that if the stock price reaches $60, the stop order is triggered, and the trader’s broker will put a limit order at a price of $40.
If the stock price plunges to $40, the limit order will be executed.
However, if the price of the stock rises above $60, the order will not be executed, and a trader will have to place a new order.
Sell Stop Limit Order
Similar to the buy stop order, the sell stop limit order also combines the two pending orders at the same time.
This means that it allows traders first to place the stop order to trigger the order and once the stop price is reached, a limit order is placed at stop price or higher to determine the minimum price they are willing to accept to sell our shares.
For instance, assume that a trader owns 100 shares of Apple company which is currently trading at $60 per share, and decides to sell its shares at $40 only if the stock first drops to $30 per share.
As a result, a trader needs to set a sell stop limit order with a stop order at $30 and a limit order at $40.
After reaching the price of $30, the stop order becomes a limit order, and finally the sell-stop limit order will be executed if the price moves from $30 to $40.
By and large, pending orders, are useful tools for traders to trade different securities at a predetermined price level in the future, manage their trades, minimize risk, and take advantage of market opportunities.
However, it should be noted that they are not guaranteed to be executed, especially in volatile markets where prices can move quickly and traders need to understand these risks before placing an order.