Using An Automated Buy Order: Buy Stops With a Limit

Posted By Tate Dwinnell |  Subscribe in a reader | Comment 0

Question: 

I am a little confused. What does using buy stops with a limit mean?  Isn’t using the buy stop good enough?
My Response:
Using a buy stop will trigger an "at the market" order at a specified price.  For example, if you were away for the day but wanted to get into a stock that might break out such as HOTJ you could set your buy stop somewhere between 3.75 and 3.80.  As soon as the stock hits that price, it will trigger a market buy order.  Depending on how fast the stock is moving, how liquid it is and the execution of your broker you might get your order filled at your requested price or much higher.  Just because your buy stop was triggered at 3.75 doesn’t mean you’re going to get that price.  What the limit order does is keep the order from getting filled at too high of a price.  This is important.  If a stock is moving quickly you could get filled way above your buy stop price.  Placing a limit order assures you of getting a certain price.  The only draw back is that your order may not get filled at all.  But at least you’ve minimized your risk. 

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