There are several benefits to utilizing both stop and limit orders, and these tools can be a valuable hedge against risk. By reviewing a buy limit order example, you can see how this investment tool can help you realize greater profits in your investment portfolio.
As with most things in the world of investing, there are some drawbacks to using both a stop and a limit order, and these types of orders may not be suitable for every security or investment strategy. If your trading strategy calls for momentum investing, a buy limit order could help you realize gains while mitigating risk.
Buy Limit Order Example For Momentum Investing
A trading strategy for chasing momentum could benefit from using a buy limit order. With this but limit order example, an investor can purchase a stock that is rising in price with the hopes that it continues to rise and produce profits. A buy stop order indicates that you would like to buy a security once the price has risen to a specified price level, referred to as the activation price.
If your research has indicated that a security is set to rise in price, and you would like to initiate a position hoping to capitalize on its upward momentum, you can place a buy limit order with your brokerage. You will place your order for an amount that is higher than the stock’s current price.
You will need to determine the highest price you are willing to pay for the security if the order is executed, and this price is referred to as the stop limit price. If a security is listed on the NASDAQ, the order will be executed when the Ask price reaches or rises above the activation price.
As the rules concerning the activation of the trade vary according to what exchange the stock is traded on, it is important to determine whether the order will be activated either by the quote of the asset at the activation price, or by a trade at the activation price. The Ask price must meet or rise above the activation price before the order is activated. When your order is activated, it will become a limit order to purchase the specified security at your limit price.
How To Place A Buy Limit Order
In general, the limit price that you enter on a buy limit order should be placed higher than the activation price. When you set the limit price higher than the activation price, it prevents the stock from trading through your limit price when the order is activated. There is the risk that your order will not be executed in a market that is rising if the limit price and the activation price are the same.
For example, you would like to purchase a security that your research has indicated has upside potential that is currently trading at $100 per-share, and you set your activation and limit price for $101 a share. If the price of the security rises too rapidly, once your order is activated and routed to the market as a limit order to buy at $101, there is the possibility that the price could have already exceeded your limit price, and your limit order will not be executed.
By placing your limit order higher, say $102, then you are increasing the possibility that your order will be executed in a fast rising market. Your limit price will depend on the maximum price you are willing to pay for a specified security.
When reviewing a buy limit order example, it is important to keep in mind that these types or orders carry the risk of not being executed due to the possibility that the security may never reach or surpass the specified limit price. In markets that are particularly fast moving and volatile, it may be impossible to execute your order at your limit price.