What is the Ask / Bid price and pending Forex orders?
What are Ask / Bid prices? What are forex market and pending orders? What are the types of pending orders? How are limit orders different from stop orders?
Hello friends! Today you will find out what the market price and market orders are, how Ask / Bid prices differ, what is a broker spread, what are pending Forex orders, what is the difference between stop orders from limit and stop limit orders, how to place pending orders and much other that you may find useful when trading forex.
If you are still new to Forex, then the first thing you need to do is find a reliable brokerage company. We recommend that you look at our independent Forex brokers rating with a detailed description of trading conditions and real reviews of traders.
What is the market price?
Market price is the current price at which a currency can be bought or sold. This price is determined by the supply and demand of the currency. A change in the supply or demand for a currency may lead to a revaluation of the market price of that currency. It can also be seen as the price at which buyers and sellers agree to trade in the market at specific times.
What are market orders?
A market order is an order to trade currency at the current market price. A Sell Market order is usually executed at a bid price. Similarly, a Buy Market order will be executed at the Ask price. It is important for traders and investors to remember that a market order will not always be executed at the last transaction price.
Although market orders are popular, many traders and investors do not consider the risks involved. An investor using market orders is unlikely to execute his order at a real-time price. When a transaction uses a market order, it basically says that it will take whatever price someone offers. This is especially dangerous in very volatile financial markets such as Forex, because a buy order can be executed at a much higher price than originally intended by the trader. Similarly, a sell order can be executed well below the price at which he expected to sell. An alternative to market orders is known as pending orders. Pending Forex orders allow traders to set the exact price of buying or selling currency.
What is the Ask / Bid Price?
At any given time, a currency pair has two quotes: Ask - offer (purchase) price and Bid - demand (sale) price. So, quotation 1.3629 | 1.3630 for the EURUSD currency pair means that you can now:
- Sell 1 EUR for 1.3629 USD (at Bid price);
- Buy 1 EUR for 1.3630 USD (at Ask price).
Accordingly, the Ask price is always higher than the Bid price.
The difference between Ask and Bid prices is called the broker spread. The larger this difference, the higher the spread. Typically, the EURUSD currency pair spread does not exceed 1-2 points.
See also low spread brokers.
What are pending Forex orders?
A pending order is an order that traders place to buy or sell a currency at a certain price, usually better than its current value. Pending orders can be used on a “set and forget” basis. There is no need to constantly monitor the charts when using pending orders. They will work even when the trading terminal is turned off, unlike the trailing stop, which is active only when the trading platform is running. A pending order can simply be set to buy or sell a currency, and then there is no need to control anything. If the price of the currency reaches the set price, the transaction will be automatically opened at this price.
In the trading terminal MetaTrader 4 there are two types of pending orders:
- Limit orders;
- Stop order.
Limit orders are used to open deals at a better price than the market offers. There are two types of limit orders, one of which is a limit on a purchase, and the other is a limit on a sale. A Buy Limit order can only be executed at the current or lower price. Similarly, a Sell Limit order can only be executed at the current or higher price.
Consider an example of a limit order. Suppose you want to buy US dollars, but don’t want to pay too much. The price of the dollar was extremely volatile and jumped up and down for several days in a certain price range, but without leaving it. Instead of waiting for a favorable purchase price, watching the charts in the trading terminal throughout the day, you can set a limit order for the purchase at the price you are willing to pay. When the price reaches the level of placing a Buy Limit order, the transaction is automatically executed and you buy US dollars at the desired price.
In Forex trading, limit orders are usually used in trading strategies according to the trend. For example, an important resistance level 1.3650 was broken, but the price has gone far enough from the level and is trading at 1.3670. You can enter the transaction with a market order, but then there will be a large stop loss, which is most often placed below the level of about 1.3648, and will be 22 points. Or you can place a Buy Limit limit order at the level of 1.3655 in the expectation that the price will test this level of 1.3650 before rushing up. In this case, the stop loss will be only 7 points, which is not as much as in the previous example.
Consider another example. Suppose a downtrend is observed in the market. And as a resistance level, a trend line appears. During the rollback, the price moves up to the trend line, and having reached it, rushes down again, updating new lows. We can wait until the price reaches the trend line during the rollback, then enter the sales with a market order, but we can not wait for it sitting at the trading terminal and place a Sell Limit pending limit order in the area of the price conditionally crossing the trend line. And when the price reaches our order, a sale transaction will automatically work at a better price with a minimum stop loss.
Placement of a limit order
To place a limit order is quite simple. By clicking on "New Order" in the MetaTrader 4 trading terminal, in the type of order, instead of "Market Execution", you must select "Pending Order". Next, you need to select the type of order - Buy Limit or Sell Limit, indicate the price at which the currency should be bought or sold and “Set Order”. After confirming the order, you can forget about it. Your buy or sell order will be executed when the price reaches the desired price. But it is worth remembering that not all pending orders are triggered. If the market price never reaches the price you set, your transaction will never be executed. Pending orders can also be left open with a predetermined expiration date. In addition, you can always change or cancel a pending order if it has not yet been executed.
See also which scalping brokers offer the best trading conditions.
A stop order is an order to buy or sell a currency as soon as the price reaches the specified target. Similarly to limit orders, there are two types of stop orders: Buy Stop and Sell Stop. A pending Buy Stop order can only be placed above the current price, while a Sell Stop order must be set below the actual price. Also, stop orders can be used to limit losses or take profit when a trader cannot actively monitor the price. As with limit orders, a stop order will only work when the price reaches the level set by the trader.
Let's consider an example when pending stop orders should be placed. Suppose you are trading on a strategy to bounce off a level. The price goes up, and on its way there is a strong level of resistance, from which we can expect a price reversal. In this case, you can place a pending Sell Stop order just below this level and go do your own thing. When the price reaches this level, a sale transaction will work.
If the price goes down, and there is a strong support level in its path, then you can place a Buy Stop pending order just above this level. If the price reaches it, then a buy transaction will work, and if the price unfolds earlier, then you simply delete this order and do not lose anything.
Stop limit order
This type of order is a combination of a stop order and a limit order. It is not in the MetaTrader 4 terminal, but it is in MetaTrader 5. There are two types of stop limit orders: Buy Stop Limit and Sell Stop Limit. Let's look at an example in which cases they can be used in trade.
For example, you need to wait until the price rises to a certain level, and then drops to the value you need, then to start to rise again. In this case, a pending Buy Stop Limit order is useful to you.
If you need the price to first fall to a certain level, and then bounce from it to the value you need, then to continue its downward movement, a Sell Stop Limit order is suitable for you.
The figure below shows examples of all considered pending orders.
See also cryptocurrency trading brokers rating.
Thus, a pending order is an indispensable assistant for a trader in Forex trading. You do not need to sit for days in front of the trading terminal in anticipation of the best conditions for concluding a transaction. You can set any of the pending orders you need, depending on which strategy you use. And the transaction will be automatically executed at the price you set without your presence. Using pending limit and stop orders expands the possibilities of your strategies and saves your time!
Read also the article "Forex Trading Sessions".