An Open Order is a fundamental concept in trading, referring to a buy or sell order that has been placed but not yet executed. Unlike market orders, which are executed immediately at the current market price, open orders remain active in the trading system until they are either filled, canceled by the trader, or expire after a preset time. Understanding how open orders work is crucial for managing trades effectively and optimizing entry and exit points in various markets such as stocks, forex (FX), CFDs, or indices.

When you place an open order, you specify the price at which you want to buy or sell an asset. The order will only be executed if the market reaches that price level. For example, if a stock is currently trading at $50 and you want to buy it at $48, you would place a buy limit order at $48. This order remains open until the stock price falls to $48 or below, at which point the order is filled. If the price never reaches $48, the order stays open and can be canceled manually or left to expire depending on the order’s time validity instructions.

There are several types of open orders, including limit orders and stop orders. Limit orders set a maximum purchase price or minimum selling price, while stop orders become market orders once a certain price is reached. Both types can be open orders if they are not executed immediately. For example, a trader might place a stop-loss order to sell a CFD on an index if the price drops to a certain level, aiming to limit potential losses. Until that price is hit, the stop order is considered an open order.

One common misconception about open orders is that they guarantee execution. This is not always true. An open order is only filled if the market price reaches the order price and there is sufficient liquidity. If the market gaps over the order price or trading volume is low, the order might remain unfilled or partially filled. For instance, during volatile market conditions or after major news releases, prices can jump past an open limit order without triggering it, leaving the order unfilled.

A practical example can be seen in forex trading. Suppose the EUR/USD currency pair is trading at 1.1000, but a trader believes the price will dip before rising again. The trader places a buy limit open order at 1.0950. If the price falls to 1.0950, the order is executed, and the trader enters the market at a better price. However, if the price never drops to 1.0950, the order remains open, and the trader must decide whether to cancel it or let it expire based on their trading plan.

In terms of formulas, while open orders themselves do not require complex calculations, understanding position sizing and risk management related to open orders is important. For example, calculating potential profit or loss based on the order price and stop-loss level can be done using:

Potential Profit/Loss = (Entry Price – Exit Price) × Position Size

This helps traders assess the risk/reward ratio before placing an open order.

Frequently searched questions related to open orders include: “How long do open orders last?”, “Can I modify an open order?”, and “What happens to open orders after market close?” The answers depend on the trading platform and market rules. Some platforms allow modification or cancellation of open orders at any time during trading hours. Others might automatically cancel open orders at market close or after a certain expiry period.

In summary, open orders are essential tools for traders who want to control their entry and exit points without constantly monitoring the market. They provide flexibility and strategic advantages but require careful planning and understanding of market conditions to avoid missed opportunities or unexpected outcomes.