Have you ever been in a situation where you place a pending order and noticed that your trade was executed without the price actually touching the price level or line you wanted to get in on your trading charts?
Is the forex broker executing trades too early without price touching it or is it something else?
Questions like:
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Why is it that for a sell order, even though price hits the take profit target level and even goes a few pips below it but still the trade is not closed but for a buy order, as soon as price hits the take profit target level, it is closed?
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Why is it that a buy stop order gets activated even though price has not touched it yet but a sell stop order gets activated as soon as price hits it?
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Why is it that a buy limit order is not activated when price reaches the entry price but for a sell limit pending order, it gets activated as soon as price touches it?
Even now, there are traders that still don’t understand why this happens. Why does this happen? Is the forex broker executing my trades too early on some types of orders?
Well, if you’ve had these questions but never seem to really understand why they happen, I hope that this article will help you understand why they happen…
And it comes down to fully understand these two things:
ASK or BID?
I used to really get confused in the beginning when I started trading forex trying to understand ask and bid. I’ll make it simple for you here. Every currency pair you see on your chart as a ASK and BID price. The difference between the ASK and BID price is the SPREAD.
Remember the following 4 bullet points:
- when you BUY (open a long position) you always buy at the ASK Price
- when you SELL (open a short position) you always sell at the BID price.
- The ASK price is always above the current price(BID price) you see on your chart.
- The price you see on your chart is the BID price
HOW ARE BUY AND SELL ORDERS EXECUTED?
- BUY orders are executed at ASK price, but MT4 charts do not show ASK price by default. This is why on the chart it looks like the trade was filled too early without price touching the entry level. But ASK price touched the entry price, it’s just not displayed on the chart anywhere.
- Sell orders are executed at BID Prices. That’s why you will see price (BID Price) hit the entry price level and get activated immediately.
You will see a buy stop pending order triggered even though the BID price (the current moving price you see on your chart) did not touch it. Why? Because the ASK price touched it, that’s why the buy order was activated. See chart below.
If you use MT4 price charts then the price bars are created using BID prices. This means you never see the ASK price unless you enable ASK price to be displayed on your chart.
How do you do that? Well, what you do is go to the “Common” tab of the “Chart Properties” window and enable ASK line:
A buy limit pending order only gets filled when the ASK price hits the entry price. That’s why you will see BID price (the default price on your MT4 platform) hit the entry price and will go down a few pips or more but it still wont get activated until ASK price reaches the entry price. See chart below:
WHAT HAPPENS WHEN CLOSING ORDERS, STOP LOSS & PROFIT TAKING?
What happens When Closing Orders?
- When you close a BUY trade, you always close it a the BID price. But remember, it was first opened at the ASK price.
- when you close a SELL trade, you close it at the ASK price. The sell trade was first activated at the BID price.
So what happens when your stop loss is hit?
- for a buy order, the BID price must touch the stop loss level price to get you out of a trade.
- for a sell order, the ASK price must touch the stop loss level price to get you out of a trade…that’s why you will see BID price hit your stop loss level but you wont be out of the trade yet until the ASK price hits the stop loss price.
What happens in Profit Taking?
- for a BUY order, the BID price must touch the take profit level in order to close your trade in profit. So that’s why you will see (If you have the ASK price line visible on your chart) ASK price reaches the take profit of your buy order but it will not close the trade at the take profit level yet. It only closed it when BID price reaches the take profit level to close the buy order.
- for a SELL order, the ASK price must reach the take profit level for the trade to be closed in profit. Which means, you will see the BID price hit the take Profit level and may even fall below the take profit level by a few pips but the trade will not close. This used to really confuse me in the beginning because I see that price has hit my take profit and even goes below the take profit level line but the trade is not closed yet.
CONCLUSION
Well, I hope what I’ve written here will finally clear some confusions surrounding how pending orders are executed without price touching the set entry price as well as understand also what happens when orders are closed, profits are taken and also when stop loss is hit.
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