Pending orders

 

A pending order is an order to initiate a position when the market price reaches the level specified in the order. A Buy Stop is an order to initiate a Buy position at a specified price which is higher than the market price when the order is placed and is executed when the Ask price is the equal to or higher than the price in the order. A Sell Stop is an order to initiate a Sell position at a specified price lower than the market price when the order is placed and is executed when the Bid price is equal to or higher than the price in the order. A Buy Limit is an order to initiate a Buy position at a price lower than the market price when the order is placed and is executed when the Ask price is equal to or lower than the price specified in the order. A Sell Limit is an order to initiate a Sell position at a price higher than the market price when the order is placed and is executed when the Bid price is equal to or higher than the price in the order.

 

As you can see, buy and sell stocks and limit orders are only executed when the specified conditions are met unlike a market order which is executed at the current price. There are many reasons why traders use pending orders. Your research and analysis may have shown that the price is going to touch a certain level and you want to buy or sell at this level. They are also used when your existing orders are making a loss but you have identified a price level at which prices will start to improve. The advantage of pending orders is that you do not have to be glued to your terminal watching and monitoring the price action. You can also use them at times when you may not be available in front of your terminal to watch market developments.

 

Forex trading versus equity trading

 

A major difference between the two markets is in the number of trading alternatives with that only a few choices available in the Forex market where is there are thousands of alternatives in the equity market. The majority of Forex traders simply concentrate on 7 currency pairs namely the so-called majors consisting of EUR/USD, USD/JPY, GBP/USD and USD/CHF and the commodity pairs consisting of USD/CAD, AUD/USD and NZD/USD. All the other pairs are just different combinations of these currencies which are technically known as cross currencies In essence, this makes research and analysis much easier because you only have to keep up with the latest developments in a few countries instead of following thousands of different companies.

 

Under certain circumstances, liquidity in the equity markets may be restricted making it difficult for you to find counterparties with whom to trade. This is particularly true of declining markets where you may find it difficult to open or close positions. Moreover many countries have restrictions on short selling requiring you to borrow the underlying stock from your broker or other investors. On the other hand, the Forex markets let you profit from both rising and declining markets because, in every trade, you are buying and selling simultaneously and short selling is an essential part of every order. Because of this high level of liquidity and the trading volumes in the Forex market, transaction costs are low and the potential of leverage is high. Equity stockbrokers charge commissions in addition to their spread making transactions more expensive whereas Forex brokers are compensated by the bid/ask spread and no extra commissions are levied. If you were trading on margin, the stock markets may require you to put up up to 50% whereas Forex traders can get away with putting up as little as 1%.

 

Another critical difference is in the trading hours. Most stock exchanges are open for trading for around eight hours every day before closing for the day and reopening on the next day. In contrast, you can trade Forex 24 hours a day five days a week because time difference is mean that some market is always open. Forex trading is global in nature and not restricted to a particular exchange which makes it an over the counter market for the retail investor.

 

Forex trading and taxation issues

 

Taxation is not something that you can normally avoid and it is necessary for you to familiarize yourself with the appropriate regulations or face the prospect of seeing your profits swallowed up by tax payments. The important thing to remember is that your tax position depends on the regulations of the country in which you live and trade. It could be fair to say that, in general, your tax position will be determined by the profits or losses that you make in your trading activity. For instance, in the United States, different tax and accounting regulations are applicable to spot trading and options trading. Again, in the United States, forex options and futures are categorized as what are known as IRC 1256 contracts which mean traders get a 60/40 tax consideration. 60% of gains or losses are counted as long-term capital gains/losses and taxed at a preferential rate ( maximum of 15%) and the remaining 40% are considered as short term and taxed at normal rates ( maximum of 35%). These principles are applied for regardless of how frequently you trade. Taxation issues can often be tricky and it is strongly recommended that you discuss the matter with your tax advisers so that you can minimize the burden of taxation.