CandleFocus Glossary Editor
A buy stop order is an order used by stock traders to enter the market or take a position in a trade when the price of a security breaks through a predetermined stop price. Buy stop orders are typically placed above the current market price with the intention of catching what is expected to be a continuation of an upward move in the price of the security. A buy stop order can be executed, or “filled”, only if the price of the security has increased and touched the designated stop price.
The main reason a trader may use a buy stop order is to capture profits from a rapid price increase in a particular security, while also reducing the risk of not being able to enter the market due to a lack of liquidity. For example, if it is anticipated that a particular security will rise quickly, placing a buy stop order will allow the trader to enter the market below the expected peak thus capturing the majority of the move and minimizing the risk of a missed opportunity.
Buy stop orders are not only used to capture profits, they can also be used to protect against unlimited losses of an uncovered short position. In a short sale, a trader is selling a security that they do not own with the hope of being able to buy it back at a cheaper price and pocketing the difference. Theoretically, a stock could continue to rise indefinitely which would incur huge losses for a trader who does not have buy stop orders in place. By setting a buy stop order at a point slightly below the market price, the trader can mitigate the risk of an exposed short position.
To summarise, buy stop orders are a trading strategy used by stock traders to either capture profits from a rapid price increase or to protect against unlimited losses of an uncovered short position. A buy stop order is an instruction to purchase a security once the price of the security reaches the specified stop price. This order is usually set above the current market price and can be filled as soon as the stop price is reached.
The main reason a trader may use a buy stop order is to capture profits from a rapid price increase in a particular security, while also reducing the risk of not being able to enter the market due to a lack of liquidity. For example, if it is anticipated that a particular security will rise quickly, placing a buy stop order will allow the trader to enter the market below the expected peak thus capturing the majority of the move and minimizing the risk of a missed opportunity.
Buy stop orders are not only used to capture profits, they can also be used to protect against unlimited losses of an uncovered short position. In a short sale, a trader is selling a security that they do not own with the hope of being able to buy it back at a cheaper price and pocketing the difference. Theoretically, a stock could continue to rise indefinitely which would incur huge losses for a trader who does not have buy stop orders in place. By setting a buy stop order at a point slightly below the market price, the trader can mitigate the risk of an exposed short position.
To summarise, buy stop orders are a trading strategy used by stock traders to either capture profits from a rapid price increase or to protect against unlimited losses of an uncovered short position. A buy stop order is an instruction to purchase a security once the price of the security reaches the specified stop price. This order is usually set above the current market price and can be filled as soon as the stop price is reached.