Automated orders have transformed trading, offering significant advantages for investors. They are algorithms that carry out a specific task upon the completion of certain requirements. With their help, you can automate the trading process, as well as improve the efficiency of your strategies.
This article will explore two major order types: buy limit and buy stop. They serve the same goal, but their differences ensure that they excel in different situations and favor different strategies. The two approaches aren’t completely opposite, but comparing buy limit vs buy stop orders reveals tangible distinctions.
Buy Limit Orders Explained
Buy limit is a commonly used order type that enables people to automatically purchase securities at a lower price than currently.
To do it, traders specify the required price level. The assets are automatically bought when the market value reaches this level or goes below it. It’s essentially a way of making sure you save money on the asset you want, although the graph is eventually supposed to go up again.
It’s a long-term solution, where you obtain a security that’s decreasing with an expectation that it reverses its current trajectory. Alternatively, you can anticipate a brief dip in value before an even bigger period of growth and cash in on it. The bottom line is that you have to plan far ahead in order for this order to work.
Buy Stop Orders Explained
A buy stop is a similar type of order. It’s also meant to capitalize on potentially bullish trends by buying low and selling high, although in a different way.
Buy stop orders require traders to set a price threshold. If the market price reaches or exceeds the line, you will automatically purchase the security you want. The catch is that you need to do it early when the trend hasn’t really caught momentum yet. It’s tricky, but more straightforward than the buy limit variety.
It’s more of a short-term approach because the requirements for this order are less complicated. You simply need to identify a bullish trend and enter it early on. After the price has grown, you can safely cash out. Just be sure to bail in time. Other order types, like take profit or stop loss, can help you with that, according to Binance Academy.
Strategies with Buy Limit Orders
Limit orders can help you in many ways, as explained by NerdWallet. But in terms of buy limit orders, they are typically used in situations where traders aim to buy a security at a lower price than its current market value or at a specific price level. Here are some common scenarios where buy limit orders can be particularly useful:
- Dips or Pullbacks. When a security experiences a temporary price decline or pullback within an overall uptrend, traders may set buy limit orders at a lower price, hoping to capitalize on the dip and buy the security at a discounted price.
- Support Levels. Traders often identify significant support levels on a price chart, which represent areas where buying interest is expected to emerge and potentially drive the price higher.
- Range-bound Markets. In markets that are trading within a well-defined range, traders can set buy limit orders near the lower boundary of the range to buy the security at a lower price. This strategy aims to capture potential price bounces as the security rebounds from the support level.
- Targeted Price Levels. Traders may have specific price targets in mind based on their analysis or trading strategy. Buy limit orders can be placed at those predetermined price levels, ensuring that traders enter the trade if the security’s price reaches their desired entry point.
Buy limit orders are an excellent addition to any long-term investment. They allow traders to control how much money they spend on securities in a given period, as well as enter the market at a much more favourable position. The only big requirement for this sort of trading is patience.
Strategies with Buy Stop Orders
Buy stop orders are typically used in situations where traders anticipate an upward price movement soon or want to enter a trade once the security’s price surpasses a specific level. Here are some common scenarios ideal for buy stop orders:
- Breakouts. When a security’s price breaks above a significant resistance level or a chart pattern, such as a trendline or a consolidation range, a buy stop order can be placed above that level. Traders use buy stop orders to enter the trade and capture potential upward momentum generated by the breakout.
- Trend Continuation. In an established uptrend, you can put buy stop orders above the recent high or a pullback level to enter the trade and continue riding the trend. This strategy allows traders to join the upward price movement and potentially profit from the continuation of the trend.
- Volatility Expansion. When there is a surge in market volatility, buy stop orders can be utilized to capture potential explosive price moves. Traders place buy stop orders above the high of a volatile candlestick or above a certain percentage above the average true range (ATR) to enter the trade and benefit from the increased price volatility.
- Positive News Events. Traders anticipating positive news announcements for a security may place buy stop orders above the current market price. Once the positive news is released, triggering a price surge, the buy stop orders are executed, allowing traders to participate in the potential upward price movement.
Buy stop orders are more straightforward. If you’ve already identified a promising upward trend, you only have to place this order at its very beginning. There are many other uses for it, but if you expect a big bullish trend soon, then a stop order is a simple, effective way to profit from it.