Buy Stop Limit Orders For Swing Traders

Buy stop limit orders for swing traders covers the basics of how a buy stop limit order works and how it fits into the execution process of a swing trading strategy like the one we implement here at The Trade Risk.

What is a buy stop Limit order?

A buy stop limit order instructs a broker to purchase a security when it hits a strike price that is higher than the current spot price. Once the price hits that strike, the order becomes a traditional limit order to buy that security at the limit price or better.

Here’s what the order entry window looks like for a buy stop limit order in Interactive Brokers.

Why use a buy stop limit order for entering a trade?

Traders choose to use buy stop limit orders for entering a trade when they are looking for confirmation, continuation, or momentum through a certain price level before entering into the position.

For instance, if stock XYZ has repeatedly failed to rally above a particular price, say $50, over the past few weeks, a trader may want to get long the stock for a breakout once it has proven that there is enough demand to clear over the $50 area.

To accomplish this the trader could enter a buy stop limit order at $50.50, which would get them into a long position on momentum.  We’ll look at some more examples below.

Buy stop limit versus buy stop

What’s the difference between a buy stop limit order and just an ordinary buy stop order and why choose one over the other?

The stop part of each order is the same. Both orders will only be executed once that stop price is triggered.  What happens after the stop price is achieved is where the difference between the two orders comes in.

If you are using a buy stop limit order, you will then have a limit order entered into the market at whatever limit price you choose (this order type requires you to enter in a price for both the stop and limit component of the order). This means your limit order may not get executed right away if you enter a price under the current bid/ask spread.

A buy stop, on the other hand, will turn into a market order to buy stock immediately at whatever price is currently on the ask. That’s a good thing for ensuring an immediate fill, but a risky proposition if the bid/ask spread is wide or a market is moving fast.

If a swing trader enters a good ’till canceled (GTC) buy stop order in the system at $51 and the next morning there is some terrific news that causes the stock to gap open over $60 at the start of the next session then this order will fill the trader at the opening price of $60 when the expectations of a fill was probably closer to the stop price of $50.

For this reason, I personally always use buy stop limit orders to ensure I am not getting filled at a price I do not want or did not anticipate.

How we use buy stop limit orders

Our swing trading strategy uses daily closing prices for our signal to enter trades. Since we scan for setups after the market closes for the day we will enter stop orders to get us involved in the trade the next day.

Here are some examples.

$BOFI was a trade signal for us to get long on June 4, 2018 as it accelerated higher through recent resistance on volume. A buy stop limit order gets placed just above the signal bar highs (42.99) and that order would have been triggered the next morning near the open to get us long.

$GPRK was another trade setup and signal for us back on May 15, 2018. We repeat the same process and enter a buy stop limit order pennies above the signal bar highs (15.60) and once again the order was triggered and filled the next day.

Trade setups don’t always trigger and that’s a good thing. Remember, we only want to enter on confirmation that the stock is ready to move in our favor.

Here’s an example of a setup that would have never triggered in $BMRN.

The stock gapped down the next morning and proceeded to sell off throughout the day never triggering our buy stop order.

Buy stop limit orders for swing traders

Hopefully, this article has helped you understand the basics of buy stop orders, why a trader would want to use them, and how they can fit into a trading strategy.

All of the examples we looked at and discussed in this article were from the perspective of a swing trader (overnight holds) but these orders are equally as effective for shorter time-frame intraday charts.

Thanks for reading and good luck out there.