In the Forex market traders use several special phrases, including the terminology that refers to whether a particular trade has been entered in a buying or selling position. When a trader is trading long, they have entered a trade by buying, for example a forex lot and they’re hoping that the price will rise. Traders will in most cases apply either one of the words buy and long to describe the same action taken. Whenever an investor trades short, they have entered a trade by selling, for example a forex lot, as they foresee that the price will go down. Traders also apply the terms sell and short in most cases to describe exactly the same action. For example, if you want to buy Australian dollars against US dollars, you would go long on AUD/USD where you would be buying Australian dollars and selling US dollars at a given price. Or in other case, if you think the Australian dollar is not going to perform well and would depreciate in value, then you could go short on the pair AUD/USD, where you would be selling Australian dollars and buying US dollars.
But what if you do not want to enter a position at the current price, but at any other price? No worries, there are four different types of market orders based on which you could enter a position at the price that you think would be suitable for you. The following four order types come under the category of ‘Pending orders’ where you set a certain price either for buying or selling and the order would trigger just as the pair’s price reaches your stated price.
- Buy Stop
It’s a form of pending order that is used when a trader expects the price to form a bullish movement; so that he could set a certain entry price for longing a pair that he thinks would be a safe point to enter. For instance, if he is trading EUR/USD pair and the current price is at 1.2820 and he thinks that it would be safe to long the pair once it breaks the level of 1.2840, then he could set a buy stop entry at 1.2850 which means that once price comes to this level, his long entry would be triggered.
- Sell Stop
Just like buy stop, sell stop is another type of pending order that is used when a trader is expecting the price to go down so that he could short a pair at a certain price he is comfortable with. For example if he is trading USD/JPY pair and it is hovering at the level of 100.20 but he thinks that it would be safe to short the pair below the level of 100.02, so he could set a sell stop at let’s say 99.92. Once the price falls down to this level then his sell entry would get triggered automatically.
- Sell Limit
The limit orders are also used for entering the market at certain price level, but the difference between limit and stop orders is that limit orders are used when a trader is using some profit maximizing tactic. Moreover, limit orders are used when a trader wants to enter the market at certain resistance or support levels from which the price could bounce back and continue its major trend after retracement.
For example, let’s say you sell the EUR/USD pair at 1.2880 and cash your trade at 1.2820 with 60 points profit and are expecting the pair to give some correction that could lead it to test 1.2850. In this case, you could set your sell limit order at 1.2850 after which the pair may continue its major trend and would continue falling down.
- Buy Limit
Buy limit works the same way as Sell Limit, but here a trader sets a certain price level at which he wants to enter as long on a given pair. For example, if he is bullish on a certain pair and is expecting the pair to rise after it gives some downward correction till 1.2820, then he could set a buy limit order at 1.2820 and may target let’s say 1.2860 for 40 points profit.
In conclusion, stop and limit orders are used to enter the market at certain price levels that may show up after some time when a trader may not be present in front of their computer screen. In short, if you believe in your analysis then you could make use of such orders whilst in the meantime you could be doing something else. This would significantly liberate you, as you would not be required to waste valuable time in front of a screen, waiting for that appropriate price level to show up.