what is a buy stop in forex

by Feb 18, 2021Forex Order Types

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If you are using buy stop order in Forex then you are one of the proffesionals in trading.

If not, then you should learn what is buy stop order so you can take advantage of it in your trading.

It is Forex order type that will help you minimize entry mistakes and it will offer you more precise entry trades.

What is Stop Order

There are two stop orders, buy and sell order. Buy or sell stop order have logic in a way that current price on the market must first reach that level in the direction, buy(bull) or sell(bear) and then order will be triggered.

That means when you want to use Buy Stop order market price must move in bull direction(long – UP) from current position and when price reaches certain level you have defined, a level at which you have set pending buy stop order then order will be triggered.

When you want to use Sell Stop order market price must move in bear direction(short – DOWN) from current position and when price reaches certain level you have defined, a level at which you have set pending sell order then order will be triggered.

Let me explain this on the examples. It will be easier to understand.

What is a Buy Stop in Forex

As explained above, stop order is when you wait for the price to reach a certain price level and then continues moving in that direction.

Buy stop order in Forex is the case when you have price falling down or rising up, but you expect the price will move up and you prepare buy order that will open in the future.

In the case price is moving up, on one level you expect the price will continue moving in the same direction. You expect that the price will continue and it will move UP.

On the level where you expect the price will continue to move up you open the buy stop order and wait for the price to come. When the price reach that level it will automatically activate and you will have open order.

There is no need to sit in front of your computer or smartphone and wait for the price to activate the buy stop order.

Everything will be done automatically.

If you shut down your PC or smartphone your buy stop order will still be activated. The reason is that your order is sent to the broker server and your buy stop order details, like entry level, stop loss and take profit level are saved on the server.

Those data are not saved on your PC or smartphone so there is no worry they will be cancelled once you turn off your PC or smartphone.

Buy Stop Order Stop Loss

Buy stop order can have other details set like stop loss and profit level. Stop loss is very important because you do not want to have buy stop order activated without stop loss.

If the trade becomes a losing trade you want to cut your loss and have the buy stop order closed.

If you do not set a stop loss in case when the price is moving against you, you can expect that the price will continue moving in the same direction and you can lose your money. Without stop loss the only level that can close your order is margin call.

Margin call will be activated when your account balance loses the majority of the money. That is not something you want to happen to you.

Buy Stop Order Profit Level

Profit level is also good to set because if you are not following the market when your buy stop is activated you can expect that the order will close when the price reach target level.

Without a profit level set, it can happen that the market continues moving in the right direction and reaches your target level, but it does not close because you did not set take profit level. Then the market can change the direction and reach your stop loss level.

That is the case you do not want to happen. The case when your order is profitable and then close as losing one.

To avoid that you should always set a profit level so you make money instead losing money.

How to Open Buy Stop Order

On the image below I have made one example to simplify whole process of Buy Stop order.

Think in this way when you want to explain to yourself how Buy Stop order works.

If you want to buy EUR/USD currency pair in the future at the price that is higher than current market price(example – 1.12778) you will activate Buy Stop order. Meaning, you expect that market will move in bull(UP) direction when EUR/USD price reaches level 1.13430.

This way you expect by your trading strategy that pair must come to 1.13430 level and then price will continue to move up. If price does not reaches that level you do not expect that it will continue to rise and your trade will not be activated.

Buy-Stop-Order-Explanation

How to Open Buy Stop Order in Metatrader 4 – Example

Now let’s see how does it looks like when you want to open buy stop order in Metatrader 4 trading platform.

You need to select new order on the Metatrader 4 and order window will open. Here you need to select:

  • Order Type
    • Pending Order
  • Type
    • Buy Stop
  • Volume
    • which lot size do you want to open
  • Price
    • at which price order will open
  • Stop Loss
    • at which price your order will close if order becomes losing trade
    • pay attention that stop loss must be below price you have set to open buy stop order
  • Take Profit
    • at which price your order will close if order becomes profitable one
    • pay attention that take profit must be above price you have set to open buy stop order

Those are main conditions you need to fulfill before you can open order. When you have entered correct data you will have “Place” button available to select. If some of the data is not correct you will not be able to select “Place” button which is helpful.

Why?

It says to you that there is error in entered data.

Buy Stop Order Example

Mostly error is in Price or Stop Loss/Take Profit levels because traders cannot understand how to enter correct values for Buy Stop order.

Buy-Stop-Order-Example

When you entered correct data and activated “Place” button you will get confirmation message as image below. It says to you that you have placed buy stop order at specific price with SL(Stop Loss) and TP(Take Profit) levels.

You need to confirm message by pressing “OK” button. 

Buy-Stop-Order-Example-Confirmation

When you take a look into chart you will see your buy stop order. There is three lines on the chart indicating your buy stop price, stop loss and take profit levels.

As you can see my buy stop price(1.13430) is above current market price(1.12798), my stop loss(1.13000) is under buy stop price and take profit price(1.13700) is above buy stop price.

I am expecting that price after it hits my buy stop order at 1.13430 it will continue to rise UP and when it hits 1.13700 order will close and I will earn money. 

Buy-Stop-Order-Example-Chart

Know that you can close your order whenever you want. You do not need to wait for take profit level or the price hits your stop loss.

If you are watching the market live and you see that the market could reverse or change the direction earlier than you thought at the first time, you just open the order window and close it.

That way you react earlier if you see possible problems and take the profit before it hits your stop loss or you can prevent bigger loss if the trade becomes losing trade.

Buy Stop in Forex – Expiration Date

As you can see at the beginning of opening a buy stop order in Forex you have the possibility to set an expiration date.

That is the setting that will close your order if your order does not open up to that date.

For example, if today is 01.02. and I set the expiration date to 15.02. the trading platform will close my order if the price does not reach my entry level.

This is useful for you because you can cancel the buy stop order if the price does not play as you thought it could.

Your strategy for buy stop order can be valid for a day or few days. And to prevent some problems in the future after your strategy is no more valid you use the expiration date to close pending buy stop orders.

Conclusion

Buy stop order in Forex is a very good tool to have.

You can use buy stop whenever you think that there is a price level above the current price, the price must first pass and then you expect it will continue moving up.

Buy stop order have other details like stop loss and profit level which you should use each time to use the most of the buy stop order.

One of the strategies you can use to set buy stop order is to place them on the breakout. Breakout is when the price breaks one level and it continues moving in the break out direction.

That level will give more chances to buy stop order being a profitable trade.

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“Disclosure: Some of the links in this post are “affiliate links.” This means if you click on the link and purchase the item, I will receive an affiliate commission. This does not cost you anything extra on the usual cost of the product, and may sometimes cost less as I have some affiliate discounts in place I can offer you”

Frano Grgić

Frano Grgić

A Forex trader since 2009. I like to share my knowledge and I like to analyze the markets. My goal is to have a website which will be the first choice for traders and beginners. Market analysis is featured by Forex Factory next to large publications like DailyFX, Bloomberg... GetKnowTrading is becoming recognized among traders as a website with simple and effective market analysis.

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