This week’s question comes from Marco, who asks:
Should we use a market order or a pending order when entering a new position?
The answer to whether you should use a market order or a pending order depends on the situation. For instance, if you know you won’t be around to execute a position, a pending order is probably the way to go.
On the other hand, if you’re at your computer when a setup is confirmed, there’s nothing wrong with using a simple market order to enter long or short.
With that said, the type of order you use also depends on your style of trading. I know of some traders who are flat out opposed to market orders because they feel there’s too much that can go wrong when entering at market such as slippage which we’ll cover momentarily.
There is also some truth to the idea that pending orders can help keep you disciplined. For instance, if you’re waiting for the EURUSD to retest 1.1200 before selling, setting a pending order and walking away is about as disciplined as you can get.
If you instead decide to sit around and watch for the EURUSD to retest 1.1200, you may be tempted to sell before the pair has actually retested the level. This tendency is also known as the fear of missing out.
In this post, we’ll discuss the use of market and pending orders along with some of the pros and cons to both. I’ll share which one I prefer as well as a little-known feature that can help you avoid slippage when entering a new position.
Let’s get started.
Forex Order Types
There are two order types used for entering a position – market and pending. A market order is executed immediately and requires you to be present at the time of execution.
A pending order, on the other hand, is set in advance and becomes a market order upon execution.
Both have advantages and disadvantages, most of which is the fact that pending orders can be used when you know you won’t be around to execute a market order.
Pending orders are known to be better with things like slippage which we’ll cover shortly. These orders are also less prone to being influenced by volatility, although that notion is debatable particularly for those with a firm understanding of how volatility impacts order execution.
Most of the time I use a simple market order. Running this website requires that I spend a lot of time in front of the computer. That means I’m often around when a pair breaks out or a price action signal forms.
There are times, however, where I might be waiting for a retracement back to a broken level and I know I might not be around for the retest. This is when a pending order such as a buy or sell limit can be useful.
By using a pending limit order, I don’t have to watch each pip tick by in anticipation of an entry. Apart from being a poor use of time, spending too much time in front of your charts can lead to bad habits.
Instead, I let the limit order do the work so I can go off and do other things.
But again, I try to use a market order when I can. This is not to say they are better than pending orders. In fact, many traders shun the idea of entering at market regardless of the situation.
For me, it’s about wanting to be around when a new position is executed. That way if there’s a mistake or the market suddenly moves in a way that causes concern, I can react accordingly.
One caveat when using market orders is that you must pay close attention to the spread which is the difference between the bid and ask price.
Spreads are in a constant state of flux, especially surrounding major news events like a Fed rate decision or non-farm payroll. Liquidity also tends to dry up during the Tokyo session as well as the first few hours of each trading week which adversely affects spreads.
Because of this, it’s important to check the bid-ask spread before placing a market order. An unfavorable spread of 10 or 20 pips will put you in the hole before the trade idea has a chance to play out in your favor.
In the world of trading, slippage refers to the difference between the expected price and executed price of a trade. This “slip” in price can be a common occurrence when volatility picks up, such as after a Fed rate decision or non-farm payroll.
One reason many traders dislike market orders is due to slippage. When you enter at market, there is no guarantee that you won’t pay more for a buy order and less for a sell order.
With that said, there is no such guarantee when it comes to pending orders either regardless of what your broker might claim. I say this because the word guarantee has a very fluid meaning in the Forex market no matter the subject.
The good news is that most Forex brokers offer some form of slip protection. Even the popular MetaTrader 4 platform has a feature that can protect you in these cases, and I highly recommend you use it.
Notice the area at the bottom of the execution window above. The checkbox that says “enable maximum deviation from quoted price” is enabled by default and is also your best friend.
Below that there is a box that allows you to enter the maximum deviation in pips. It defaults to 10 pips, but you may want to set it even lower than that. It depends on your style of trading and pair being traded, but I certainly wouldn’t go above 10 pips.
If you don’t use MetaTrader, chances are your broker’s platform offers a similar feature. And if you can’t find it right away, be sure to ask your broker so you can put it to work the next time you enter a trade.
Whether you use market orders, pending orders or a combination of both depends on your style of trading. Like most things we do, it comes down to what suits your personality and approach to the markets.
Market orders are great if you’re around when a currency pair sets up, just be sure to mind the bid-ask spread. An unfavorable spread, particularly those that occur during the Tokyo session and market open, can ruin an otherwise favorable setup.
Pending orders are an excellent option if you know you might not be at the computer when a market retests a given level. Just be sure to double check your numbers because you won’t be around to correct any mistakes made on the order ticket.
Regardless of whether you use market or pending orders, it’s a good idea to have some form of slip protection. Most Forex trading platforms have this feature built in but if you aren’t sure where to look, just ask your broker to point you in the right direction.
Your Turn: Ask Justin Anything
I’d love for this new weekly Q&A to be successful and provide an invaluable repository of answers to common Forex questions.
To do that, I need your help.
Here’s what you can do to get involved and have your question answered in next week’s post:
- Ask questions. Post them in the comments below or Tweet them to me @JustinBennettFX
- Help me answer questions. If I missed something or if you have something to add, don’t hesitate to leave a comment below.