Types of Pending Orders in Trading: How They Work & When to Use Them

What are Pending Orders?

Did you know you can automate your trades using pending orders while trading in the financial markets? A pending order allows the trader to set a predetermined price that will be automatically executed in the future. Moreover, it is essential to note that the trade will only be executed once the current market price reaches the pending order that you have placed. This makes setting a trade more manageable and convenient if you don't have time to sit in front of your laptop/phone and wait for your price target. 

Types of Pending Orders

When trading stocks CFDs or any other product, there are four types of pending orders: Buy-Stop, Sell-Stop, Buy-Limit, and Sell-Limit (Figure 1). Each type has a specific function and serves a different purpose, whether you are buying or selling. 

Figure 1: Types of Pending Orders

Buy-Stop Order

A buy-stop order is used when a trader places the trade at a pre-specified price and predicts the price will rise after reaching a certain level, taking advantage of an upward movement in the asset's price. For example, let’s say that the current market price of an asset is $10, and based on the traders' strategy, they predict that it will increase to $20; however, to reach $20, the price should rise to $15. So, the trader places the buy-stop order at $15, so once the current market price reaches $15, the platform will automatically open the trade, and as long as the price increases, the trader will be making a profit (Figure 2). 

Figure 2: Buy-Stop Order

Sell-Stop Order

The Sell-stop order is similar to the concept of the buy-stop order, but instead, the trader predicts that the price will drop. The sell-stop order is used when a trader places the trade at a pre-specified price and expects the price to drop after reaching a certain level, taking advantage of a downward movement in the asset's price. For example, let’s say that the current market price of an asset is $10, and based on the traders' strategy, they predict that it will decrease to $2; however, to reach $2, the price should drop to $5. So, the trader places the sell-stop order at $5, so once the current market price reaches $5, the platform will automatically open the trade, and as long as the price drops, the trader will be making a profit (Figure 3). 

Figure 3: Sell-Stop Order

Buy-Limit Order

A buy-limit order is when a trader predicts the price will increase and buys an asset at or below a specified price. This allows the trader to buy the asset cheaper rather than paying a higher cost at the entry point. For example, the current market price is at $10; the trader predicts that the price will increase after reaching the lower level, which is $5 in this case, allowing them to buy it at a cheaper price. Once the current market price reaches the buy-limit order at $5, the trade will automatically be executed, and as long as the price increases, they would be gaining profit (Figure 4).

Figure 4: Buy-Limit Order

Sell-Limit Order

A sell-limit order has the same concept as the buy-limit order but is instead used when a trader predicts the price will drop and sells an asset at or above a specified price. This allows the trader to sell the asset at a more expensive price than at a lower cost at the entry point. For example, the current market price is at $5; the trader predicts that the price will decrease after reaching a higher level, which is $10 in this case, allowing them to sell it at a higher price. Once the current market price reaches the sell-limit order at $10, the trade will automatically be executed, and as long as the price decreases, they would be gaining profit (Figure 5).

Figure 5: Sell-Limit Order

Conclusion

Pending orders allow traders to automate their traders by setting predefined entry points based on market expectations. Whether using buy-stop, sell-stop, buy-limit, or sell-limit orders, traders can plan their trades without constantly monitoring price movements. Understanding how to use pending orders effectively can give traders more control over their strategies and help them capitalize on market opportunities.