Buy limit order
It is a type of order in which a buyer attempts to buy a currency pair, stock, or bond at a specific price or at a better price.
To understand the buy limit in a simple way if you are willing to buy a cell phone. Your budget is $100, and your desired mobile phone is being sold for $105. You will wait for the price to drop in your budget.
Once the price is dropped to $100 or lower, you will execute a move to purchase the mobile phone. So, as a buyer, you set your buying limit in your mind and wait for the product to drop. To execute a buy limit order, a trader will buy the asset at a specified price or at a lower price.
The buy limit order type includes,
- The setting of the buying limit
- Execution of the deal once the desired price is achieved
- No guarantee of the fulfillment of the order is given
- It depends on the availability of the sellers
- The price might not reach the limit you have set
| Pros | Cons |
|---|---|
| It provides better control to the investors as the price is set at a lower level than the current market. | As the investors set the buying price lower than the current market price, there is a chance that traders miss the chance of execution of a trade. If the market price doesn’t take a dip, the investors can miss the chance of completing a move. |
| It provides better entry points and positions to a trader while entering a trade. | An investor can miss several opportunities while waiting for the price to lower and entering into a trade. |
| This method provides the luxury of flexibility while entering a trade, as the trader can enter a trade at any given time of the trade. | Entry into a trade can be delayed as you must wait for the price to lower. |
| A trader doesn’t need to pay extra funds when the market spikes instead of decreasing. | Entering a trade at your offered price in a volatile market can be challenging. |
| Buy limit offers better budgeting by avoiding overpaying. | The price of the execution in a trade can be different from the desired price. |
It promotes patience instead of emotional moves while trading, greatly impacting forex trading. |
Buy stop order
It is the type of order in which a trader buys an asset at a price that is higher than the current market price.
In this type of order, a trader or investor expects an appreciation in the price of an asset in the future and tends to buy it even at a higher price than the current market price.
To understand the buy-stop order, let’s assume you are going to buy a currency pair, and you expect a future appreciation in its price. The currency market value of the currency pair is $20, and you expect that it will rise in the future. You place an order at $22 and believe that it will move up to $30 in the near future. Your broker will execute the trade for you once the price of $22 is achieved.
So, you end up buying the stake at a higher price than the current market, yet expect a significant amount of profits in the near future because of continuous appreciation in the asset’s value.
Buy stop order includes,
- The actual cost of the execution of a trade may be higher than the stop price.
- Buy stop order is usually opted for entry into a trade
- A trader buys at a higher price than the current market value
- It is considered an anticipation move
| Pros | Cons |
|---|---|
| It can help benefit the market breakouts when you enter a trade. | In a buy-stop order, the buying price is already higher than the current market price. When the price is achieved, the buy-stop order automatically converts into a market order. |
| It is beneficial in fast-moving trading markets. | A trader can buy at a higher price if the anticipated price is not achieved. |
| You can benefit from the rising trend of the market. | A trade might not have significant control while choosing a buy-stop order type. |
| It helps in capturing trading opportunities in no time. | False breakouts in the market can affect your trades. |
| Buy-stop order also provides flexibility as you can enter a trade anytime during a trading period. | It is challenging to execute a trade in a highly volatile market. |
| A trader can limit his potential losses by placing buy stop order. So, this method is used as a risk management tool. |
Comparison Table
A buy-limit order can be compared to a buy-stop order on the following factors.
- The objective of an order
- Activation of an order
- Execution of a trade
- Relationship with current market price
The following table will detail the comparison between a buy-limit order and a buy-stop order.
| Factors for comparison | Buy limit order | Buy stop order |
|---|---|---|
| The objective of an order | To buy at a specific price that is lower than the current market value | To buy at a price that is higher than the current market value |
| Activation of an order | It is activated when the price reaches the set limit or falls lower than the set limit. | It is activated when the price reaches or exceeds the set price. |
| Execution of a trade | When the threshold of lower price is achieved | When the threshold of the higher price is achieved |
| Relationship with price | When the price is expected to decrease | When is the price expected to appreciate in future |
Example 1:
Suppose you are trading a currency pair, and the current market value of that currency pair is $108. To execute a buy limit order, you will set a desired price of $103, which is lower than the current market price. Once the threshold of $103 is achieved, your broker will execute the trade for you.
Example 2:
Suppose you are trading a currency pair, and the current market value of that currency pair is $108. To execute a buy stop order, you will set a desired price of $110, higher than the current market price. Once the threshold of $110 is achieved, your broker will execute the trade for you.
Uses
Buy-limit orders and buy-stop orders are two different trade strategies. Different conditions force a trade to switch between these two buying strategies.
The usage of these two buying order types is given below.
Uses of buy limit order
- If an investor expects a drop in the value of an asset, he tends to buy it at the lower market value to ensure his future potential returns.
- A trade uses the buy limit order method to ensure its security with a safe entry.
- As a trade buy at a lower level than the current market value, he can benefit better from future appreciation.
This method provides a better and more secure entry point to a trader so a trader can execute his moves more patiently.
Uses of buy stop order
- It is used to enter a trade by placing the order at a higher price than the current market value.
- It is used to benefit from the future potential gains in the market
- It is executed when the price of an asset is expected to rise, so it is more of a trend-following trading method.
This method provides better entry conditions in a volatile market where prices can move in any direction.
Conclusion
Buy-limit orders and buy-stop orders can offer different opportunities to a trader. If the market is rising and the asset’s price appreciates, the traders tend to choose a buy-stop order. If the future trend shows that the price of an asset is going to fall, a trader tends to choose to buy a limit order.
The choice of a trading method can impact your trade and trading opportunities. Your future profits and losses are directly proportional to your trading method.