Alton Hill is a Cofounder at TradingSim. He has a passion to help people and found that one of his ways of doing so, is through the world of Day Trading. Alton’s skillset is in Product Development and Design Thinking which he uses to write and improve the overall experience for TradingSim.
Feeling overwhelmed with the various order types you can place in the market?
Well, let me be the first to tell you that it can feel like swimming in a sea of endless possibilities. While you may not use every order type, it is important to at least be aware of the options that for you to apply to your trading regiment.
In this article we are going to cover the buy stop order and when you will want to use this order type.
Table of Contents
What is a Buy Stop Market Order?
The buy stop order is an instruction to your brokerage firm to execute a long position at the market at a predetermined price. This order type is available across all security types (stocks, futures, options, and forex).
How to Enter a Buy Stop Market Order
Select Stop Market Order
Navigate to the order entry portion of your trading platform and select stop order. In TradingSim, this is located within the trade ticket area of the platform.
Stop Market Order
Select Order Duration
Next, you need to select if you want the order to expire on the same day or if you want a good-til-cancel order which often lasts for 30 days.
In this buy stop market order example, we have selected day order. If you are day trading, I recommend you also use day orders. The last thing you want is to have a GTC order out there that executes.
Take it from my experience; there is no greater fear when trading of not knowing you held a position overnight that the system opened on its own when you were not even at your desk.
Stop Market Order
Enter Desired Price
Buy Stop Market Activation Price
In this buy stop market order example, I have entered 149 as the buy level. This means if Facebook were to hit 149, my market order would trigger.
Determining Which Buy Stop Market Order to Use
As a trader, you first need to determine if you are going short or long.
If you are going long, you will want to enter a buy stop order to enter a position. This means you are willing to buy a stock once it climbs higher to a specific price.
You will find that traders going long with stop market orders are breakout traders.
For short traders, a buy stop market order is what you use to exit a position. This means that you are short a position and the buy stop market order is where you will close out the position to prevent any further losses.
Where can Buy Stop Market Orders Fail You?
The big issue with buy stop market orders is you don’t know what price you are going to get on your order. For example, if you are looking to enter a position at $100, your order will execute the trade at any level above $100.
Now, where the price spreads are tight, this is not an issue. However, if the spreads open up, you could end up paying way more than you would like.
Why is this important?
When day trading, each quarter percent can be critical towards your bottom line. Therefore, market orders can lead to uncertainty in terms of your ability to estimate your profits.
For example, in my own experience, when I enter a buy market order for short trades, it’s likely not a good experience.
When a market is racing higher, shorts are tripping over one another to get out of the position. So, what do you think that will do for you when trying to exit the position?
That’s right, you are going to be racing to get out and will essentially take whatever price you can get.
Pros and Cons of Buy Stop Market Orders and Limit Orders
If you are a trader that you are looking to get into a trade and will manage the risks, a stop market order is likely your best bet. This can be the case if you are looking to purchase a large order or if you are trading penny stocks that move quickly and certain price levels are jumped.
If you are scalp trading and each tick has tremendous value to you, then you will want to use limit orders.
Trading High Volume Stocks
If you are trading high volume stocks, limit orders should be your preference. For example, if you are trading Facebook or Apple, do you think you will ever have trouble filling a limit order?
Probably not. So, if you can place a limit order you will not have a problem getting filled.
How Can TradingSim Help?
Regardless of your system, you need to see which order type works best for you. You will want to test market, stop and limit orders to see which methods will generate the most profit for your business.