what is a buy stop order
a buy stop order instructs a broker to purchase a security when it reaches a pre specified price once the price hits that level the buy stop becomes either a limit or a market order fillable at the next available price this type of stop order can apply to stocks derivatives forex or a variety of other tradable instruments the buy stop order can serve a variety of purposes with the underlying assumption that a share price that climbs to a certain height will continue to rise basics of a buy stop ordera buy stop order is most commonly thought of as a tool to protect against the potentially unlimited losses of an uncovered short position an investor is willing to open that short position to place a bet that the security will decline in price if that happens the investor can buy the cheaper shares and profit the difference between the short sale and the purchase of a long position the investor can protect against a rise in share price buy placing a buy stop order to cover the short position at a price that limits losses when used to resolve a short position the buy stop is often referred to as a stop loss order the short seller can place their buy stop at a stop price or strike price either lower or higher than the point at which they opened their short position if the price has declined significantly and the investor is seeking to protect their profitable position against the subsequent upward movement they can place the buy stop below the original opening price an investor looking only to protect against catastrophic short position loss from significant upward movement will open a buy stop order above the original short sale price buy stop orders for bullsthe strategies described above use the buy stop to protect against bullish movement in a security another lesser known strategy uses the buy stop to profit from anticipated upward movement in share price technical analysts often refer to levels of resistance and support for a stock the price may go up and down but it is bracketed at the high end by resistance and by support on the low end these can also be referred to as a price ceiling and a price floor some investors however anticipate that a stock that does eventually climb above the line of resistance in what is known as a breakout will continue to climb a buy stop order can be very useful to profit from this phenomenon the investor will open a buy stop order just above the line of resistance to capture the profits available once a breakout has occurred a stop loss order can protect against subsequent decline in share price example of a buy stop orderconsider the price movement of a stock abc that is poised to break out of its trading range of between 9 and 10 let s a say a trader bets on a price increase beyond that range for abc and places a buy stop order at 10 20 once the stock hits that price the order becomes a market order and the trading system purchases stock at the next available price the same type order can be used to cover short positions in the above scenario assume that the trader has a large short position on abc meaning that she is betting on a future decline in its price to hedge against the risk of the stock s movement in the opposite direction i e an increase of its price the trader places a buy stop order that triggers a buy position if abc s price increase thus even if the stock moves in the opposite direction the trader stands to offset her losses 