What is Buy Stop Limit?
Learn how this order type works and how you can use it in your strategy.
* Trading is risky. Your capital is at risk.
Key takeaways
Buy Stop Limit orders allows a trader to specify a price above the Current Price of the instrument they are trading.
In this context, that specified price above is simply referred to as Price. If and when that Price is reached, a Buy Limit order is automatically placed at a lower level (because the golden rule of trading is always to buy low). This lower level is called the Stop Limit price.
In this context, the Buy Limit will be placed only if the Ask price reaches the Price. We are referring to it as Ask price, of course, because we are looking to buy. Once the Ask price drops to the Stop Limit Price, the Buy Limit order is triggered and the position is closed. So, for example, if a trader was looking to buy EURUSD and the current price is 1.3050, he may decide to put the Price at 1.3150 because he believes it will reach that point. But, because he believes that it will reverse and start going back down, he places a Buy order with a Stop Limit Price at 1.3100.
Buy Stop Limit is used by traders who anticipate that the price movement of their instrument will experience a temporary downswing before resuming higher.
What is the difference between a buy stop and a buy limit?
With a Buy Stop Order you set the Price higher than the current market price.
With a Buy Limit Order the limit price is always lower than the current market price, not higher.
In a Buy Stop Limit Order the two work together.
To create a Buy Stop Limit Order you’ll set two price points:
Stop: this activates the Limit Order to buy
Limit: this specifies the highest price you are willing to pay
When should I use a buy stop Limit?
A Buy Stop Limit is for when you predict a temporary fall in price, followed by an upswing. It can help you to:
Get your orders filled at better prices
Manage your investment risk, while you’re away from your trading screen
Control the timing of your orders, and price at which they’re filled
How far apart should the price and buy limit be in a buy stop limit?
It’s best not to be too strict with your price limits. If the price of the orders is too tight, they could be constantly filled due to market volatility. Buy Stop Limit Order prices should be at levels that allow for the price to rebound profitably while still protecting you from excessive loss.
Any disadvantages to using buy stop limits?
One potential downside with this type of order is there’s no guarantee that an execution will occur. That’s because the price generated by the market may never meet or beat the limit price you’ve set.
Is there a 'sell stop' equivalent of a buy stop limit?
Yes, the Sell Stop Limit works just like the Buy Stop Limit, but it’s an order to sell if the price falls to, or below, the Stop Price. The two price points you’ll need to set for a Sell Stop are:
Stop: this activates the limit order to sell
Limit: this specifies the lowest price you are willing to pay
How long does a buy stop limit last?
If it doesn’t trigger because the Price isn’t reached, your Buy Stop Limit will run until the time you set for it to expire. That could be at close of market, or it could carry over to further trading sessions. You can cancel a Buy Stop Limit at any time.
Stop: this activates the limit order to sell
Limit: this specifies the lowest price you are willing to pay