If you've ever thought to yourself that you'd like to get in a trade automatically once the market starts moving in your direction, you're already thinking like a professional trader. That's exactly what buy stop orders accomplish, giving you the ability to take advantage of breakout moves without being glued to your trading screen around the clock.
You can think of pending orders as your automated trading function. Instead of every time you see an opportunity, manually enter a trade, you can set up orders and let them execute automatically when certain conditions are met. Of these, a buy stop order is probably the most powerful order for trend-following strategies.
Buy stop orders are naturally just an instruction to buy above the current price. You are telling your broker; "When this currency pair goes above this level, buy it for me right away!" Just like setting up your gaming account to automatically buy those exclusive coins when their price reaches your target – but again, it is about real cash and the potential for real profit.
What is a Buy Stop Order
Let’s skip the hype, and get to the point. A buy stop order is an order to buy a currency pair at a price above the current market. A buy stop is not a market order; it will sit until the market comes to it. Here is an example of how a buy stop works. Let’s say the EUR/USD is at 1.0800 and you think a move above 1.0820 would trigger some buying momentum. You would place a buy stop order at 1.0820. Your order sits inactive until the market trades at 1.0820, then BOOM, it becomes a market order and a fill takes place.
A good way to think about it is that you are setting an alarm to buy those limited edition gaming coins, you definitely do not want to pay the current price, but if the price pops to 100 bucks a coin, you want a few coins and you want to buy them immediately. Your buy stop will execute automatically at your target price.
Benefits of Buy Stop Orders
There are three distinct benefits a buy stop order can provide that can alter your complete trading operation. The first is they are just plain the best at capturing momentum. When a currency pair or asset crosses a significant price level, the first move is usually just a pop. Buy stops allow you to get on board at the station just as the train is leaving.
There is the automation aspect to buy stop orders that cannot be overstated. No need to babysit the charts for breakouts. You set your buy stop order, you walk away after it dictates your trading arrows and you wait for the market to come to you. It is like a trading assistant who is woken 24/7, who never needs a break or is ever distracted and who executes trades mechanically.
How to Set a Buy Stop Order
Select Your Trading Instrument Select a currency pair you are familiar with, which typically has bullish breakout characteristics. Major pairs (e.g., EUR/USD, GBP/USD, USD/JPY) often respect technicals better than exotic pairs.
Determine Your Breakout Level This requires some technical analysis, look for potential resistance levels such as swing highs, or round numbers, or any points at which price has struggled to push through. The more obvious the level the more likely other traders are watching it too.
This point is key - never place a buy stop without first determining the stop loss and take profit amounts. An example of a trade setup might be: Buy stop at 1.0823, with stop loss at 1.0790 and take profit at 1.0880. That would essentially give us a 1:2 risk-reward ratio.
Risks and Precautions of Buy Stop Orders
Buy stops are not a cure-all – they can carry legitimate risks that can have a negative impact upon your account if you don't know what you're doing. Knowing these risks in advance is what separates regular profit taking from real account loss.
Slippage Risk: This is your biggest enemy with buy stops. In volatile environments, your order can be filled well above where you were trying to get in at. You have a buy stop set at 1.0820, but then news breaks and price gaps higher and you get filled instead at 1.0835. Not such a big deal right? Well, 15 pips can ruin a risk-reward ratio in a heart beat and almost guarantees your stop is hit before you are able to make the trade.
Conclusion
Buy stops are some of the most powerful tools a forex trader has at their disposal. However, like other powerful tools, buy stop orders require skill and discipline to utilize effectively. Buy stop orders are not about predicting market direction; they're about providing the opportunity to profit immediately when the markets show their hand by making dramatic breakout moves.
The main principles we've discussed are not just theoretical principles; they are well-documented practices that are used by professional traders and institutions around the globe. When you place buy stops, you should be placing them above current price levels with the risk parameters defined, targeting known technical levels, and when the market is liquid – and this is never solely in isolation of other systematic methodologies.
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