Buy Stop vs Buy Limit: What Is The Difference?

Buy stop and buy limit orders are important tools for any trader. You must understand the functionality of each, how they can benefit you, and the potential drawbacks of using them. Read our in-depth guide explaining the differences between buy stop and buy limit orders.

What is a buy stop?

A buy stop order instructs your broker to purchase an asset at a pre-agreed value above its current market price. The stop price you set triggers the order when the asset’s market price reaches or exceeds it, converting it to a market order. Once triggered, the buy stop executes at the prevailing market price, which may slightly differ from your set stop price.

The order is not executed until the asset reaches the stop price, at which point the order becomes a market order and the position is opened.

Buy stop orders are most often used to hedge against short positions, where losses will occur if an asset's value begins to rise. Unlike a stop loss order, which aims to limit losses by selling an asset, a buy stop order helps protect against rising prices in short positions. In contrast, an order to sell, such as a stop loss, is used to exit a position when the price falls, limiting potential losses.

A stop-loss order is often paired with long positions to protect against unexpected price declines, unlike the buy stop’s role in short positions.

In that instance, a buy stop order can help to mitigate those losses because you will profit if and when the value rises above the price you set when placing the order.

An example of a buy stop order

• Stocks in Company XYZ are trading at $15 each
• You have already taken up a short position, but wish to offset some of your losses if the share price starts to rise
• So, you place a buy stop order at $16. Once the order is placed, it remains inactive until the market price hits or exceeds your set stop level. Once the market price hits $16, your order will be filled as a market order, opening your position
• The share value of Company XYZ does indeed rise
• Once it reaches $16, your buy stop order is executed and your position is open
• You are making a loss on your short position but have successfully hedged against that thanks to your buy stop order
• If the share price never reaches your $16 buy stop, the order will never be executed

What is a buy limit?

A limit order is an order to purchase an asset at or below a specified price, ensuring a cost-effective entry. This limit price ensures you only buy the asset at or below your specified threshold, maximizing cost efficiency.

Your buy limit will be set at a value which is below the asset's current market price. This order to buy is only executed when the market price reaches or falls below your set limit, ensuring a cost-effective entry. The specified price you set for a buy limit order ensures you enter the market only at a value you’re comfortable with. Traders use a limit order to secure a favorable entry price, avoiding purchases at higher market levels. This buy order ensures you only enter the market at a price that aligns with your trading goals.

As with a buy stop, your buy limit order will not be executed unless the asset drops to that value or falls below it.

An example of a buy limit order

• Stocks in Company XYZ are trading at $15 each
• You don't want to pay that much, so you set a buy limit order at $14. When you place a buy limit order, you ensure the trade only executes at your desired price or better, offering cost control. Setting a specific price for your buy limit order allows you to target an exact entry point for maximum value
• The share value of Company XYZ begins to fall
• Once it reaches $14, your buy limit order is executed and your position is open
• If the trend reverses and the price subsequently starts to recover, you can close your position having made a profit
• If the share price of Company XYZ never falls as far as $14, your buy limit order will never be executed

Buy stop vs buy limit: Which is right for me?

When comparing a buy limit versus a buy stop, it's important to understand the key difference between the two types of order and what they're used for:

• A buy limit order is most suitable when you want to pay below the current market price for an asset.
• A buy stop order is typically used when you're looking to hedge against a short position you already hold on an asset.

Although there are key differences between buy limit and buy stops, neither will be executed unless the value of the asset reaches the price you set when placing the order. Unlike a stop-limit order, which combines a stop price with a limit price to control execution, buy stop and buy limit orders convert directly to market orders upon reaching their trigger price. Choosing whether to buy or sell using these orders depends on your trading strategy and market expectations. Each order to buy or sell, whether a buy stop or buy limit, serves specific purposes based on your market outlook. Understanding different order types, such as buy stop and buy limit, helps traders align their strategies with market conditions.e order.

What are the pros and cons of buy stop and buy limit orders?

As with all forms of trading, there are certain levels of risk and reward attached to placing buy stop and buy limit orders. We've outlined the pros and cons below, most of which apply to both types of order.

Advantages of buy stop and buy limit orders

• They allow you to be more time-efficient in that you're not required to manually monitor the markets and wait for an asset's value to reach a certain level.
• If you place the order as 'good 'til cancelled' (GTC), you could benefit from overnight gapping if the price isn't reached by the end of the first trading day but then re-opens at an even more favourable price. This advantage is particularly valuable when the market reopens on the next trading day at a price that aligns with your order.
• These types of orders offer a measure of control in that you'll never enter a position at a price you're not comfortable with.
• In the case of buy stop orders, they enable you to hedge your short positions and offset some of your losses.

Disadvantages of buy stop and buy limit orders

• Unless placed as GTC, they're typically only day orders. This can limit your opportunities.
• There are no guarantees of execution; if an asset's value never meets the price stipulated in your order then it will never become a market order. Market conditions, such as low liquidity or rapid price movements, can further complicate order execution. Even if it meets the price, there may be other orders ahead of yours in the queue that need to be filled first.
• They can lead to missed opportunities. Setting an exact price for your order may result in missed trades if the market doesn’t reach that precise level. For example, if you set a buy limit order a little too low and an asset doesn't quite fall to that price before experiencing a significant rise, you'll have missed out on potentially large profits.
• Although less common than it used to be, some brokers may charge higher commission fees for buy stops or buy limits compared to placing market orders. Placing a market order executes at the available market price, potentially avoiding fees but sacrificing the price control of stop and limit orders. Buy stop and buy limit orders may not be suitable for all investors, especially those unprepared for the risks of non-execution or market volatility.

Trade using buy stop and buy limit orders with Tradu

As an investor, open your account with Tradu today to access thousands of tradeable assets via our seamless platform. If you want to invest using precise order types, Tradu’s platform supports buy stop and buy limit orders for strategic trading.

You can use buy stop and buy limit orders to retain a measure of control over your positions, while you can leverage our expert insights by checking out our in-depth Knowledge Centre.