Buy Stop Order Explained | Trading Tutorial

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One of these basic order types, included even in web-based discount brokerage platforms, is the buy stop order.

What is a buy stop order?

A buy stop order is an order to buy a security or other financial market, similar to the "standard" buy limit order. In simple terms, a buy stop is an order to buy a security at a price higher than the current market price.

The order sits idle in the market until the market price reaches the stop price, at which point the order is activated and becomes a market order.

This may sound strange, you may think, "If someone wants to buy, why wouldn't they buy at a higher price?". There are several reasons for this. The most common is that the trader believes that a breakout or uptrend will begin when the market trades above a certain level.

Another use for a buy stop order is a stop loss on a short trade.

When selling a stock short, it is always wise to have a stop loss, but you cannot use a buy limit as a stop loss because a buy limit order will buy the stock at or below the limit price.

This would cause you to exit the trade as soon as you enter it. On the other hand, a buy stop order can be set above your short entry price and will only be activated when the market reaches that price. How to place buy stop orders for entries and exits.

The most common reason to use a buy stop as an entry point is when the chart does not look strong at the current market price, but if a level were to be released, then a good trading opportunity would present itself.

The chart below is an example of what I am talking about.

trading spot

Buy Stop Order on the Chart

As you can see, in this scenario, the Singapore Exness has just closed a gap down after recently making a new intermediate-term high. Buying at this point might not make sense as there is significant short-term downside momentum and no signs that the selling has already cooled.

However, there are a few levels on this chart that might cause an interested trader to take a position:

    The first is filling the gap between 1.17477 and 1.18741.
    The break of the recent swing high around 1.18741 is still to come.
    An intact uptrend can be seen.

Depending on the type of trader, a trader would put a buy stop at one of the above levels and anticipate a continuation if the price breaks the level. If the market continues to decline, the buy stop would not be activated and the trader would avoid exposure to further bearish price action.

    In the example above, one would bet on the breakout at the highs

Buy stops are also used as an exit for short trades. Perhaps you have shorted a stock around its resistance level because the market doesn't look strong enough to break out.

You could place a buy stop two ATRs (Average True Range) above the resistance level. This way, when the stock breaks out and shows a continuation, your Buy Stop is activated and the trade is closed.