What Is a Pending Order and How Does It Work?

A pending order represents a specific instruction given to a brokerage firm to execute a trade at a future time or at a specified price, rather than immediately at the current market price. This allows individuals to pre-set their trading parameters, automating the process. Such orders act as pre-programmed commands that remain active until the designated market conditions are met.

Types of Pending Orders

Financial markets utilize different types of pending orders, each designed for distinct trading scenarios. These orders provide flexibility in managing positions and executing strategies.

Limit orders allow a trader to buy or sell a security at a specified price or a more favorable price. A buy limit order instructs the broker to purchase an asset at or below a certain price. For example, if a stock is at $50, a buy limit order at $45 executes if the price drops to $45 or lower. A sell limit order directs the broker to sell an asset at or above a specified price. If a stock is at $50, a sell limit order at $55 executes if the price rises to $55 or higher.

Stop orders are instructions to buy or sell a security once its price reaches a predetermined “stop price,” converting into a market order. A buy stop order purchases an asset once its price rises to a specified level, often used to enter a trade anticipating further upward movement or to cover a short position. For example, with a stock at $10, a buy stop order at $15 triggers a purchase if the price reaches $15 or higher. A sell stop order sells an asset once its price falls to a specific level, serving as a stop-loss mechanism to limit potential downside. If a stock is at $10, a sell stop order at $8 initiates a sale if the price drops to $8 or lower. While a stop order guarantees execution once the stop price is met, it does not guarantee the exact execution price due to potential slippage in volatile markets.

Setting Up a Pending Order

Placing a pending order involves specifying several parameters on a trading platform. First, select the specific order type, such as a Buy Limit or Sell Stop, from the available options. This selection dictates the order’s basic behavior.

Next, set the entry price, the exact price point at which the order should be triggered. This defines the specific market level for the transaction. Also, specify the volume or quantity of the asset to be traded, such as shares or units.

Finally, traders must set the expiration, or “time in force,” for the order, which determines how long it remains active. A Good ‘Til Cancelled (GTC) order stays active until filled or manually canceled, though brokerages often impose a maximum duration. A Day Order is valid only for the current trading day and automatically expires if not executed by market close. Other options include a Fill or Kill (FOK) order, which demands immediate and complete execution, canceling if not met. An Immediate or Cancel (IOC) order requires immediate execution of all or part, with any unfilled portion canceled promptly.

Strategic Applications of Pending Orders

Pending orders offer traders functional utility, enabling specific approaches to market participation. They facilitate automated execution, allowing individuals to set trades in advance without continuous market observation. This is helpful for those unable to constantly monitor price movements.

Pending orders also provide precise price control, ensuring trades occur only at desired price levels. This helps achieve specific entry and exit points and manage slippage, the difference between expected and actual transaction price. This control is valuable in volatile markets.

Furthermore, pending orders aid in risk management. Stop orders, especially stop-loss orders, limit potential losses by automatically closing a position if the market moves unfavorably beyond a predetermined threshold. Limit orders can be used for profit taking, automatically closing a profitable position once a target price is reached. Pending orders also support specific trading strategies, such as breakout trading using buy stop orders or reversal trading with limit orders at anticipated support or resistance points.