For traders, forex trading can involve a multitude of tools to help them make smart trading decisions. Example of a tool are "pending orders". Pending orders allow you to set trades, ahead of time. It frees you up from needing to have your computer on and staring at the market all day long.

A pending order example is called a Buy Limit Order. This order tells your broker to buy a currency pair when the price drops to a certain level, or below. If you want to use an analogy, think about the Buy Limit Order like you want to purchase something, but only if it gets lower in price.

Buy Limits orders are common in forex trading because currency prices move quickly and up and down constantly. Traders will set Pending orders (Buy Limit Orders) to catch a good entry point without have to watch the market 24/7.

Background & Theoretical Foundation

Buy Limit Orders did not start with forex trading, they were used in stock markets and futures markets long before. Wall Street traders needed a means of buying stocks at an advantageous price to them without having to sit watching the market all day.

When forex markets were opened to retail traders, in the 1990s, these forms of orders came along too. It was thought that the logic that applied to stocks applied perfectly to currency pairs, and it did.

The premise behind a Buy Limit Order could not be easier: "buy the dip"; simply to wait for prices to fall before you buy, instead of chasing prices higher. As long as you are waiting, the market has a chance to come to you.

Buy Limit Orders operate under one principle only: it will trigger under the market price that you chose to set or lower. When you use a Buy Limit Order the market has to go to your Buy Limit before your order triggers. If you set a Buy Limit on the EUR/USD at 1.0900, it would not trigger until the market price hits 1.0900 or you hit a lower price.

This information is different from a Market Order. A Market Order buys on the spot at available market price as soon as possible. A Buy Limit Order waits for your order price.

Traders will routinely use a Buy Limit Order for many reasons. First, traders notably do not want to chase prices that are rising. When they chase prices, they most likely buy at the worst time. Second, traders want to position themselves at their ideal entry points before the market gets there.

Comparing the Different Pending Orders

Understanding Buy Limit Orders means you must know how they compare to other types of orders. Each order type has different functions for trading.

Buy Limit - Buy Stop is the most important comparison. Buy Limit Orders are activated when the price declines to your level. Buy Stop Orders are activated when the price rises to your level. Buy Limit Orders are used for buying at lower price levels. Buy Stop Orders are used for buying a breakout.

Integration with Technical Analysis

Buy Limit Orders are enhanced through technical analysis methods. Technical analysis gives you better levels to place orders. Support levels and trend pullbacks are great uses for Buy Limit Orders. 

Support levels are truly awesome for Buy Limit Orders. Support is a zone where the price stops falling and changes direction to create a rise. When Buy Limit Orders are placed in combination with support levels, you set yourself up with a good chance of being filled at better pricing.

Best Practices & Practical Tips 

Setting up your Buy Limit Orders correctly is a matter of knowing your trading platform and employing well-established practices.

Most retail traders will have used MetaTrader 4 or MetaTrader 5. To place a Buy Limit on MT4, all you have to do is right-click on your chart and go to the 'Trading' tab, then choose 'New Order'. When the New Order window appears, select 'Pending Order' and in the dropdown box, select 'Buy Limit'. You can then enter your desired price, lot size, stop loss, and take profit.

Final Thoughts

Buy Limit Orders bring together the three essential trading components of planned entries, risk management, and trading efficiency. Buy Limit Orders allow you to buy currency pairs at your desired prices, not chase your setups during market action.

Buy Limit Orders are best suited for those who have pre-planned strategies and trading plans. They are not for traders who like to respond quickly to market news or like to trade on impulse.

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