Trading orders are one of the essential parts of the trading process. They can be confusing for newcomers. Trading orders are either buy or sell, and they designate the direction of a trade.
The two main order types are market orders and pending orders. Pending orders are further categorised as buy limit, buy stop, sell limit, and sell stop orders. Market orders are buy or sell orders and are instantly executed.
A market order is the execution of a buy or sell order at the current price.
E.g., You want to sell GBP/USD at the market price. The bid price for this pair is 1.3500, and the ask price is 1.3502.
If a sell order is placed, the pair would be sold to you at 1.3502 (Ask price). As soon as you opt for ‘sell’ on your trading platform, the order would be placed at that price. Depending on the market conditions, the price you sell might have changed slightly when the order is executed. Always remember that the prices are changing every second because of the trading that occurs around the world.
Pending orders are placed and executed as soon as the order conditions are met on the trading platform. Two types of pending orders exist, limit, and stop orders. Limit orders are categorised as buy and sell limit and stop orders into buy stop and sell stop orders.
Buy Limit Order
A buy limit is placed to buy below the current market price. The price, therefore, must return to the buy limit price for it to be triggered and the trade to be executed. The intention of placing a buy limit is that the price will pull back and go up further.
An example of a Buy Limit, the order will be triggered once the market reaches the price at the red dashed line.
Sell Limit Order
Sell limit orders are set at a price above the current market price. The intention is that the price will move up further, trigger the sell limit and go down again.
An example of a Sell Limit, the order will be triggered once the market reaches the price at the red dashed line.
Buy Stop Order
A buy stop order is a stop order that instructs the broker to enter a long trade above the market. A buy stop order is only executed if the pair reaches or exceeds that specified price.
An example of a Buy Stop is that the order will be triggered once the market reaches the red dashed line.
Sell Stop Order
Sell stop orders are set at a price below market price and is triggered once the market reaches or exceeds that price.
An example of a Sell Stop is that the order will be triggered once the market reaches the red dashed line.
Stop Orders are typically used for trading price breakouts, especially if the trend of a specific pair is in a strong up or downtrend.
Good knowledge of technical analysis and price action is required to identify limit and stop orders.