BUY STOP ORDER Meaning and
Definition
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A buy stop order is a type of order placed by an investor or trader to purchase a security at a specified price that is higher than the current market price. It is generally used to capitalize on upward price movements or as a protective measure to limit potential losses.
When placing a buy stop order, the trader specifies a stop price above the current market price. If the market price reaches or surpasses the stop price, the order is triggered and the security is purchased at the prevailing market price. This type of order is used to confirm an upward breakout, whereby the security's price is expected to continue rising after breaking through a resistance level. It can also be used to limit losses when a short position needs to be covered if the security's price rises above a certain threshold.
Buy stop orders are commonly utilized by active traders who closely monitor market trends and react quickly to price changes. They can be placed with brokerage firms or online trading platforms and are typically valid until the end of the trading day. However, it is important to note that the execution price of a buy stop order is not guaranteed, as it depends on the prevailing market conditions and liquidity.
