Forex traders normally use market orders to enter positions quickly, but you have various order types you can choose from. One of those orders, a buy stop order, lets forex traders specify what price they want to enter a currency pair. Once the currency pair reaches the desired price point, the trade goes through. This guide will explore some of the ways forex traders can use buy stop orders in their strategies.
How Do Buy Stop Orders in Forex Work?
A forex buy stop order allows you to buy a currency pair the moment it goes above a certain price. Forex traders use these orders to capitalize on momentum and benefit from future price improvements. If the currency pair does not reach or exceed your designated price, the trade will not go through.
It’s one of the types of market orders you can place. Stop orders, limit orders, trailing stop orders, and stop loss orders are some of the other options for forex traders. Each of them has a different purpose, and buy stop orders aim to capitalize on confirmed momentum.
When to Use a Buy Stop Order
Forex traders can use buy stop orders to get exposure to a currency pair when it reaches a breakout point. For instance, a forex investor may want to wait for EUR/USD to rise from 1.15 to 1.20 before getting exposure.
In this example, assume that 1.20 represents a resistance line. Assets that break their resistance lines tend to gain more momentum and offer quick wins for traders. The trader could buy at 1.15, but without technical confirmation, there is a greater risk of the currency pair losing value.
Some traders would prefer to minimize their risk and potential gains by waiting for a technical confirmation, such as a currency pair breaking a resistance line. You can buy it at a lower price beforehand, but it’s possible that the trade moves against you and breaks the support line instead.
Buy Stop vs. Buy Limit
Buy stop and buy limit orders are two popular forex trading strategies. Here’s how they differ.
| Aspect | Buy Stop | Buy Limit |
| Entry Price | Above current market price | Below current market price |
| Purpose | To catch upward breakouts | To buy at a lower price after a dip |
| Trading Strategy | Momentum-based entries | Pullback or discount-based entries |
| Execution | Order triggers after price rises to set level | Order triggers when price falls to set level |
| Typical Use Case | Expecting price to continue rising | Expecting price to fall, then bounce |
Pros and Cons of a Buy Stop in Forex
Buy stop orders have several advantages and disadvantages to consider. These are the highlights.
Pros
Forex buy stop orders offer several benefits and have the potential to enhance your portfolio growth.
- Avoids false breakouts: Forex traders can wait for a currency pair to break its resistance line and confirm an uptrend before starting a position.
- Sets predefined entries: You don’t have to monitor your screen for your brokerage firm to execute a buy stop order on your behalf.
- Supports automated strategies: Forex traders don’t have to follow the markets 24/7. Your trading strategy can produce gains even if you only view your account for 15 minutes per day.
Cons
Although buy stop orders can be beneficial if you use them well, they have some risks to consider before getting started.
- May trigger on spikes: A buy stop order will trigger if the currency pair goes above the set price, even if it’s for a brief time. This order can take place during a spike, but the forex trader would lose money as the currency pair drops. Some spikes can happen in a matter of minutes.
- Can miss better entry prices: Buy stops allow traders to wait for confirmation, but it also means leaving money on the table if the currency pair hits your designated price. Buying the currency pair before a technical confirmation could have netted more money if the technical indicator is confirmed anyway.
Adding Buy Stop Orders To Your Forex Trading Strategy
Buy stop orders can be a useful resource for any forex trader that helps them manage risk and capitalize on broken resistance lines. However, this isn’t the only type of forex order you can use. Combining it with buy limit orders and other forex trading strategies can help you generate positive returns on your capital.
Frequently Asked Questions
Which is better, buy stop or buy limit?
Buy stop orders are better for confirming trends before entering a position. Meanwhile, buy limit orders are optimal for entering a position at a lower price.
When to use a buy stop?
You can use a buy stop order if you want to wait for a currency pair to break past its resistance level before buying.
What are the risks of a buy stop order?
The risks of a buy stop order include missing out on the upside, leading to the technical confirmation, and if the currency pair loses value shortly after the trade is confirmed.
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About Marc Guberti
Marc Guberti is an investing writer passionate about helping people learn more about money management, investing and finance. He has more than 10 years of writing experience focused on finance and digital marketing. His work has been published in U.S. News & World Report, USA Today, InvestorPlace and other publications.
