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.
Buy limit vs buy stop: What to expect from our
guide
- What is a buy stop?
- An example of a buy stop order
- What is a buy limit?
- An example of a buy limit order
- Buy stop vs buy limit: Which is right for me?
- What are the pros and cons of buy stop and buy limit orders?
- Advantages of buy stop and buy limit orders
- Disadvantages of buy stop and buy limit orders
- Trade using buy stop and buy limit orders with Tradu
What is a buy stop?
A buy stop is an order you can place to instruct your broker to purchase an asset at a pre-agreed value –
one that is above its current market price. The order is not executed until the asset reaches that price, at
which point it 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. 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
- 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 buy limit is an order you can place to inform your broker that you wish to purchase an asset once it
drops to a certain price or lower. Your buy limit will be set at a value which is below the asset's current
market price. 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
- 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 vs 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.
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.
- 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. 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. 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.
Trade using buy stop and buy limit orders with
Tradu
Open your account with Tradu today and gain access to thousands of tradeable assets via our slick,
seamless platform. 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.
