Experienced investors always go by the rule that says “Don’t put all your eggs in one basket”.
Traders’ secret weapon: pending orders
2020-07-21 • Updated
Information is not investment advice
There are situations when you don’t want to enter the market at the price it offers you. Reasons can be different. For example, you know that you can buy the pair at a lower price and you just wait. Or you are not sure about the further direction of the price but know that if the pair reaches a certain level, its further direction will be clear. So, what should you do? Sit in front of a monitor and wait until the price level meets the conditions you want? Definitely not. Pending orders were created for you!
There are two types of the pending orders. They are limit orders and stop orders. As a trader always makes a choice whether to buy or to sell, it’s logical that there are two types of limit orders: buy limit and sell limit. Stop orders can also be broken down into buy stop and sell stop orders.
Let’s start with a limit order.
Imagine that you suppose that although the price is going down now, it will rebound from the certain level and then go up. As a result, you should place a BUY LIMIT order at the price you think will be a reversal point for the price (below the current price). The feature of this type of orders is that you can buy at a lower price.
Vice versa, there may be a time when you see that the price is moving up but you are sure that it will meet a strong resistance, recoil from it and go down. In this case, you should place a SELL LIMIT order above the current price. A feature of this type of orders is that you can sell at a higher price.
Notice that you use limit orders when you expect either a support of a resistance level to hold.
What about another type of pending orders, a stop order?
Stop orders are used when a trader expects the price to get through a resistance or a support level.
Imagine that the price goes up and you are sure that if it reaches a certain level, it will go even further. In this case, you should place a BUY STOP order at the level above the current price.
Conversely, assume the price goes down and you have a perception that after it reaches a certain level it will go down even further. As a result, you place a SELL STOP order below the current price.
You may ask: why should I use the stop order if the price doesn’t rebound and just continues its movement in the same direction? I can buy at the lower price or sell at the higher. There is a hint here. The stop order is used to accurately confirm the further direction of the price. If the pair reaches a certain level, you can be sure it will go further, otherwise, it can rebound before it reaches the level you chose.
An important tip: remember that if the price doesn’t reach the level you chose in your pending, the trade won’t open. A big threat for your profit is hidden here. You must close the order if it was not implemented. Otherwise, you can forget about it and a trade will open at the time when you don’t want it. One of the solutions is to set the expiry time for your pending orders.
Making a conclusion, we can say that pending orders are a great way to reduce your efforts and time in front of the screen. Moreover, pending orders will help to be sure in the future direction of the price and let you enter the market at the most attractive price. This is a great way to make your trading more precise and more profitable!
Although the market is flat 70% of the time, most of the trading strategies are for trend trading. Thus, most traders use only 30% of the trading potential! If you want to be more productive, pay attention to this strategy.
Stock indices are perfect for beginners as for experienced traders. In this article, you’ll find the list of top-rated index funds and get some tips!