In forex trading, traders often use passive and aggressive orders in their daily activity. What is the difference between them? A passive order is a order in which the price is different from the typical bid – ask market price. Traders set a price that the currency pair must reach before they buy or sell. This type of order introduces a new price, creating a new entry in the order book, waiting for other participants to hit it. There is a time limit because if the transaction is not executed at the specified price within the given period, then the order expires. The further the new price is from the market price, the more passive the order is. Aggressive orders, instead, are when a trader executes the order to buy or sell immediately. This type of order waits for the price to come to it. The aggressive order follows the price.
The passive order can be placed when buying or selling a stock or other instruments. For buying, the price is set below the ask price. For selling, the price is set above the bid price. For example, suppose the bid price for GBP/USD is 1.4050, and the asking price is 1.4052. When traders want to buy the GBP/USD, they can decide to use a passive order and place a buy order, suppose, at 1.4049. Since the asking price is 1.4050 the passive trade will not be executed immediately but it will be filled when the pair is bought at 1.4049. The trader has the possibility to cancel the order before it is filled.
One disadvantage of this order is that it may not be executed at the desired price. However, traders using passive orders could be waiting for an aggressive order to appear and accept the specified price.
Another difference between passive and aggressive orders is that the former provide market liquidity, the latter use it. When an order price is closer to the market price, an aggressive order takes place. Unlike the passive order, the aggressive order will be executed immediately because the price is set at the bid/ask price or above/below the price provided that there is enough trading volume on the market.