A pending order is an instruction to buy or sell an instrument when certain preconditions specified by the trader are met. Pending orders fall into two categories, limit orders and stop orders. Essentially, when placing a pending order a trader is informing their broker that they do not want the current market price, but rather that they only want their order executed if the market price reaches a certain level.
Limit orders limit the price at which a trader is prepared to buy or sell. There are two types of limit order; a buy limit order instructs that an instrument is bought at a specified price or lower, a sell limit order instructs that an instrument is sold at a specified limit price or higher. Limit orders are especially useful in preventing slippage as they guarantee that an order will be filled within the specified limits or not at all. The downside of limit orders is that even though they prevent slippage, they are at risk of not being filled at times of high volatility.
Stop orders are pending orders which also instruct that positions are opened or closed when specified prices are reached. Though frequently confused with limit orders they differ from them in a key respect; when the market price reaches the level specified by a trader in their stop order, a market order is then automatically placed. As such limit orders are affected by the same issues as Market Orders at times of high volatility. Because they effectively become market orders when triggered they are also affected by slippage and poor fills in certain market conditions. Buy stop orders are entered above the current market price and sell stop orders are entered below the current market price. Stop orders are used to lock in profits, restrict losses, or to go long when an asset’s price is rising and short when it is falling.