In forex trading, there are many terms that may be foreign to the ears of novice traders. Some examples include Buy Stop, Sell Stop, Buy Limit, and Sell Limit. These four terms relate to the different types of Pending Orders that can be applied to the trading platform, if the trader does not want the order to be executed at the current price.
For example, currently AUD/USD is at the level of 0.7130. You expect that AUD/USD will strengthen to the level of 0.7250, but only if the price can rise again to 0.7160. In such a condition, then you cannot apply a Market Order as usual, but must apply a Pending Order which will only be triggered if the price has passed 0.7160. Method? By selecting the Buy Stop option on the order form.
Similar scenarios create different types of Pending Orders. However, what are the rules? This article will review further.
Buy Stop and Sell Stop
Buy Stop and Sell Stop are included in the “Stop Order” order group type. Buy Stop is applied if you want to open a Buy position above the current market price. While Sell Stop is installed if you want to open a Sell position below the current market price. Buy Stop and Sell Stop will not be active if the price has not reached the level you have set.
For example, in the AUD/USD sample above, you have implemented a Buy Stop at the level of 0.7160 with a Take Profit target of 0.7250. The order will only be active if the price movement of AUD/USD continues to increase from 0.7130 to reach 0.7160. However, if AUD/USD drops to 0.7100, the Buy Stop will expire.
In practice, the order forms for Buy Stop and Sell Stop are similar to ordinary Market Order forms. However, when filling out the form, the trader must fill in the “type” field with “Pending Order”, not “Instant Execution”. After that, specify the type of Pending Order as “Buy Stop” or “Sell Stop” depending on the projected direction of price movement. Enter the desired trading volume (lots), along with the Stop Loss and Take Profit levels. Then, also determine the Stop Order expiration period.
There are usually three types of Stop Order expiration dates on the Metatrader platform, namely GTC, Today, and Specified. “GTC” stands for “Good Till Canceled”, meaning that the Stop Order will remain in effect until you cancel it or until the price moves to a predetermined level. “Today” means the Stop Order will be void if the price does not reach the relevant level within one trading day. Meanwhile, if you select “Specified”, it means that you also have to specify a certain expiry date when the Stop Order will be canceled automatically.
After determining the expiry period, you can immediately click “Place” to place a Stop Order. After that, you can close the platform and PC/Laptop to do other activities. Later trading platforms such as MT4 or MT5 will execute orders automatically, if the price has reached the range stated on the form. Very easy isn't it!?
Buy Limit and Sell Limit
Buy Limit and Sell Limit are included in the “Limit Order” type of order group. A Buy limit is applied if you wish to open a Buy position below the current market price. While Sell Limit is installed if you want to open a Sell position above the current market price. In other words, Limit Orders are applied with the assumption that price movements will experience a reversal (Reversal or Retracement). Both will not be active if the price movement later does not return to the level you have set.
The form model for Buy Limit and Sell Limit is the same as the form in the previous example. Determining the expiration date can also be done as in the example above. The difference is, after selecting the type of Pending Order, you must choose the Buy Limit or Sell Limit options.
For example, when AUD/USD is at 0.7130, you expect the price to continue to fall to the 0.7100 level, but will rise to 0.7200. In this situation, you can apply Sell Limit at the level of 0.7100 with a Take Profit target of 0.7200.
On the other hand, if you expect the price to go up to 0.7200, but will first drop to 0.7100, then you should apply Buy Limit. To be precise, the Buy Limit is at 0.7100 with the Take Profit target at 0.7200.
Important Things You Need to Pay Attention to
Note the differences in the implementation of Buy Stop, Sell Stop, Buy Limit, and Sell Limit above. If necessary, practice using it on a demo account first, before using it for real trading on a real account. If mixed, it is not impossible that your trading results will be chaotic. Many novice traders who when trying to use it can not profit, even stagnate.
Also, don't forget to always set an expiration limit or cancel orders that are no longer active, because the default option is GTC. If the order with the GTC label is not cancelled, the order may be triggered at an inopportune time. These various types of orders are provided in the forex trading platform with the aim of making it easier for traders. However, if used without adequate knowledge and experience, it can result in blunders.