What is Buy Stop order and why

In the daily Portfolio update, I frequently refer to “Buy Stop”. Then what is “Buy Stop”? And why?

I think you should all know stop loss, well, if you don’t even know stop loss, then this web site is definitely not for you. A stop loss is actually a “Sell Stop” where you set a trigger price, say $10, so when stock price drops below $10, the order is triggered automatically therefore your stock is sold automatically. This saves you time and energy for having to watch the stock every minutes. “Buy Stop” is the opposite of the “Sell Stop” where you put a trigger price, say $20 above the current trading price, so when the price rises above $20, the stock is bought automatically which again saves you time and energy for having to watch the stock you want to buy every minutes.

The question is why you need “Buy Stop”?

Say, we see a nice Head and Shoulders Bottom, we want to buy breakout, we cannot watch every minutes and it’s hard to catch exactly the breakout price, so instead we put a “Buy Stop” a few cents above the neckline, say, $121.75, so when the breakout occur, your order will be filled automatically.

The next chart shows the breakout does occur and your order should be filled around $121.75. The tinted areas are the text book target measured according to different pattern. Well, enjoy the ride!

Isn’t that simple and exciting? Well, just want to reminder you, in reality, not all breakouts are real, in the example above, it turned out to be a failed breakout…