How to Use Buy Stops to Enter a Position

 

One tool that experienced traders use to get into a position, or catch a price breakout, is a buy stop ABOVE the market. This can also be used to reenter positions that have been stopped out. Here are a few examples:

XYZ trades at $48, the 52 week high is 49.56 and a trader wants to enter a position only if price makes a new high. The trader can put a buy stop order into the system to enter only if price trades OVER 49.56. The order works similar to a sell stop loss order in that it triggers at the market if a certain price is hit first. If price trades over 49.56, the order gets filled and the trader does not have to constantly monitor the position.

ABC gets stopped out at $36.20 and edges lower. A trader who wants to avoid further downside, can put a buy stop order in the system at (example) 37.50. If the stock continues lower, the trader avoids further downside. If the stock bottoms and then reverses back higher, when it hits $37.50 the buy order will trigger and the trader will be back in the position.

Both of these scenarios enable the trader to enter on a move higher, but help to limit downside if the position never reclaims the stated price. As with all trading or investing, certain risks apply, including being whipsawed and reversed again, so the concept needs to be fully understood before using it.

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