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
|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
|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.
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
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.
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.
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.
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.