#12: What is a buy stop order
What is a Buy Stop Order
A Buy Stop Order is an order placed above the current market price.
The order gets triggered if the price were to reach that level.
(And the opposite is a Sell Stop Order.)
So, how does a Buy Stop Order work?
Let me explain…
Let’s say you want to buy EUR/USD.
Its exchange rate now is 1.12345.
Let’s assume you want to enter only when the price makes new highs.
So you’ll place a Buy Stop Order at a price higher than 1.12345.
You could place it at 1.12400 for example.
The Buy Stop Order will be triggered if EUR/USD hits 1.12400 or higher.
Let’s say you want to buy Amazon shares.
But maybe you don’t want to buy now unless there are fundamental catalysts to confirm the bullish trend.
And you want to let that reflect on the share price.
What should you do?
Assume Amazon’s share price is $1,900 now.
You’ll buy only if it makes new highs.
So you could place a Buy Stop Order at $2,000 to be in the trade when its share price rallies.
Pretty straightforward, isn’t it?
Why you should use a buy stop order
Here are a couple of reasons why a Buy Stop Order will benefit you…
You’re trading a breakout strategy
You’re expecting the price to go much higher if it breaks the resistance level.
A breakout could happen within seconds.
So even though you’re watching the chart, you could miss out on the trade.
What you can do is to place a Buy Stop Order ahead of a breakout.
That way, you can always be in the trade.
Improves your trading psychology
By using a Buy Stop Order:
- You’re less likely to miss a trade
- You don’t have to chase the price when it gets overstretched
- You don’t have to glue your eyes to the chart the whole day waiting for that breakout
- You’ll become less emotional in trading – saving your account from self-destruction
The downside of using a buy stop order
As convenient as a Buy Stop Order sounds, it doesn’t guarantee a profitable trade.
Because your Buy Stop Order might get triggered on a false breakout.
So what happens?
The price hits your Buy Stop Order.
But instead of continuing higher…
The price falls lower, and you get stopped out.
And now you start to ask:
“Why am I even buying high and looking to sell higher?”
Because in the next section…
I’ll share with you how to properly use the Buy Stop Order for your breakout strategy.
How to use buy stop order and find high probability breakout trades
- Identify a resistance level
- Wait for a build up to form at resistance level
- Place Buy Stop Order slightly above the resistance level
Step 1: Identify a resistance level
You’ll use the previous swing highs to identify resistance.
Step 2: Wait for a build up to form at resistance level
After resistance has been formed, don’t place a Buy Stop Order just yet.
Wait for the price to form a build up near resistance level.
Step 3: Place Buy Stop Order slightly above the resistance level
Then place your Buy Stop Order slightly above resistance instead.
Now, a Buy Stop Order is just one of the tools to help you trade the breakout.
If you want to learn more, then check out The Complete Guide to Breakout Trading.