A pending order is a trading instruction given to a broker to execute a trade when the market price reaches a set level, determined by the trader in advance. It allows traders to plan their trades ahead of time and automatically enter or exit positions based on predetermined price levels.
When a pending order is triggered, it becomes an open order and is executed according to the specified price. This is particularly useful for traders who cannot continuously monitor the market or who want to take advantage of potential price movements without being actively present.
Capital.com offers two types of pending orders:
1. Limit order: a limit order is used to enter a trade at a specific price level that is better than the current market price. For long positions, this is when the specified price (ie ‘Buy when price is’) is below the current market price. For short positions (ie. ‘Sell when price is’), it is above the market price.
The advantage of this order type is that you retain control of the price (ie the entry level cannot be any worse than the level you choose). However, if the market does not reach your desired level, you will miss out on the opportunity to open the position.
2. Stop order: A stop order is used to enter a trade at a specific price level that is worse than the current market price. For long positions (ie ‘Buy when price is’) the specified price is above the current market price. For short positions (ie ‘Sell when price is’), it is below the market price.
The advantage of this order is that you can secure entry to a market where you believe the trend will continue, or where you expect a significant market movement (for instance where there has been news overnight that is likely to impact the market opening price). However, the opening price will be determined by market conditions and is not limited to a set level. Therefore, if the stop orders may experience slippage on the entry price.
Example of a stop order slippage:
A US pharmaceutical company closes at $2.50 per share. While the market is closed, the company announces it has completed a successful trial of a new drug that is a dramatic improvement on the current market leader.
Anticipating that this will significantly increase the value of the company, you place a ‘Buy when price is’ Stop order for 100 shares at $2.60 per share. However, there is strong interest from other market participants, and when the market opens at 9.30am NY time, the opening price is $3.00 per share. As the market did not trade at $2.60, your stop order is filled at the next available level, which in this illustrative example is $3.00.