So, you’ve just identified a decent opportunity to go long on trade, but you’re unsure whether to use a market or pending order and the effects of choosing either. Two scenarios could occur.
You might enter with a market order and only figure out seconds later that the trade did not fulfill all the criteria according to your trading plan despite seeming like a position worth taking initially. The result could then be a loss to your account.
The second scenario is using a pending order, but unfortunately, the price does not reach the order level, and the market takes off without you. These are some of the outcomes facing traders regularly in the markets, making it essential to decide on the best entry method to use consistently.
This article will detail how each of these orders works, the group of traders commonly using them, and the pros and cons of the two.
What is a market order in forex?
A market order is an instruction to a broker for a trader’s position to receive immediate fill at the current price. It is the most basic type of order available on all trading platforms. Once execution takes place, the account will typically reflect the spread according to the lot size on order.
Why would a trader use a market order instead of a pending order?
A market order allows for instant execution, meaning traders do not need to wait long to enter a position. One will hardly miss a trade using this approach due to the immediate fill. This order allows for one to react quickly after having spotted an opportunity.
Depending on market conditions, someone using market execution may receive a more favorable entry without waiting and second-guessing themselves. Of course, all of these assumptions are valid if the trader has absolute conviction in entering the position in the first place, bringing us onto the drawback.
The biggest disadvantage of market execution is not having the ability to correct any mistakes afterward. Traders are inclined to overtrade and become aggressive because of the relative ease of executing in this manner, particularly with one-click trading.
Generally, short-term traders are likely to use market orders as they naturally have less patience when executing and will frequently be near their trading platforms. Most news strategies benefit more from the market instead of pending execution as trading in this manner needs someone who can make a split-second decision as price tends to move quite fast.
What is a pending order in forex?
A pending order is a type of order where a trader instructs their broker only to execute a long or short position when the price reaches a predefined level in the future. Instead of trading instantly at the current value, the pending order would only trigger if the market reached it.
Pending execution comes in two forms, limit and stop orders.
- Buy limit and sell stop: These are pending orders which are below the current market price.
- Buy stop and sell limit: These are pending orders which are above the current market price
Why would a trader use a pending order instead of a market order?
The main point of pending orders is for when traders aren’t near their computers or mobile phones to execute a trade. Some strategies may require someone to enter at a particular level. So, even when a trader has identified a potential set-up to buy or sell, their trading plan could dictate waiting for a candle to close, a retracement, a breakout, or something else.
As traders cannot always be near their computers or phones, they may consider a pending order to avoid missing out on the trade. Interestingly, some people who could naturally use market orders might still think of utilizing pending orders.
For instance, a trader who uses a momentum indicator such as the RSI (Relative Strength Index) may need to thoroughly assess the momentum before entering. In this scenario, the trader is price-sensitive and needs a bit more confirmation before pulling the trigger.
They may also need an entry point that could produce a better risk to reward. The most evident benefit of pending orders is it encourages patience. There is far less urgency to enter a trade and allows someone more time to re-confirm taking a position. Should someone feel they’ve missed something in their analysis, they can delete the order.
On the pitfalls, there is no guarantee the market will fill a particular pending order. Therefore, the chances of missing a trade are a lot higher than with market execution. Generally, long-term traders are more prone to using pending orders as they naturally have more patience when executing.
Final word
Ultimately, there technically is no universally correct way of entering a position because it entirely depends on someone’s preference, experience, and strategy. A market order guarantees instant execution where the trader does not need to wait once having identified an opportunity to go long or short.
On the downside, this style of execution could lead to an entry mistake that one cannot usually correct without a small or large loss. Therefore, a trader needs to have absolute certainty that a setup has ticked all the boxes according to their trading plan.
On the other hand, some traders find immense advantages with pending orders depending on their strategies. Using this approach fosters patience, where a trader can always delete the order in the likelihood of uncertainty.
The more time-sensitive one is, the likelier they are to utilize market orders. In contrast, the more price-sensitive a trader is, the more likely they will use pending orders.
