Each trader must have a certain set of entry criteria, which when met ‘allow’ him to enter the market. After the proper analysis is conducted and the entry conditions are met, a trader can enter the market either by market execution or setting a pending order.
Market execution refers to the action of executing an order manually on your trading platform. When market executing, you are entering a trade at the current price displayed at that exact moment. As we can see on the figure below, the price of EURAUD was was 1.59343 at the moment, and if we bought or sold at that time, this level would be our entry.
Pending orders can be seen as conditional market execution orders. There are 4 types of pending orders. Let’s assume we are looking at the same EURAUD chart as in the previous example. Our bias might be bullish after our analysis indicates so, but we think that due to certain factors, price will advance lower before turning to the upside. A buy limit is used under these circumstances. The use of a buy limit is depicted on the figure below. The hollow candlesticks represent our brief forecast of future price movement. A buy limit must always be placed at a level that stands below the current trading price of a currency pair. When price reaches the prespecified level, which in this example is 1.5868, a buy position will be automatically executed in the market.
When our analysis supports a bearish bias, but we anticipate further bullishness in the market before it turns to the downside, a sell limit order comes into use. The specifications of a buy limit discussed earlier apply to the sell limit, but in the opposite direction, as presented on the figure below. In this scenario, a sell position would automatically be executed as soon as price rises to the level of 1.59804.
While limit orders are used in anticipation of a potential reversal in price movements, buy stops and sell stops come in need when anticipating a further continuation of price in the same direction. A buy stop is a buy order placed on a level higher than that of the current price, while a sell stop is a sell order placed below the live price. Both examples are displayed in the respective figures below. Stop orders are based on a continuation bias. If we have placed a buy stop order on EURAUD at 1.59658, we expect the price to continue its rally after breaching this line, as represented by the hollow candles in the example below. Similarly a sell stop order is used when forecasting a bearish continuation.
In conclusion, the method of execution a trader chooses is personal, and no one can determine if one is better than the other. It all comes down to the methodology of technical analysis each of us uses in the market, and subjective preferences. The MarketNerd prefers live executions and limit orders over stop orders, but this doesn’t have to be the case with every trader.