How to prevent the opening of a limit order if a gap appears and the price turns out to be above the opening level?
How to prevent opening a limit order if a gap appears and the price turns out to be above the opening level
This scenario often happens in the market and can be confusing for many investors.
Many traders define a potentially profitable setup and place a limit order and expect that in this case the position will be opened at the set or better price.
However, the problem is that many buyers are taking the same actions at the same time and the price can make a gap.
Limit orders are ineffective if the asset price ” jumps ” above the entry price. The point is that the limit price is the maximum that an investor is willing to pay for a share.
And in this case, it is below the market. The risks of such situations can be minimized by opening buy-stop and buy-stop limit orders.
A buy-stop order goes into a regular market order after the price touches the set level. To understand how this happens, consider a hypothetical example.
Let’s say the value of a share of company XYZ is $ 12.86 and the trader concludes that the value of the security will rise.
Therefore, he places a buy-stop order at $ 13.01. Accordingly, as soon as the price reaches this mark, the order will turn into a regular market order .
Using this approach, the trader insures himself against situations when the price turns out to be above a certain level and the order is not executed.
However, in this case, the trader risks opening a trade at a higher price if there is a rapid growth.
For example, if the stock price the next day at the opening is $ 17, the order will be triggered exactly at this level, instead of the $ 13.01 desired by the trader.
The buy-stop-limit order helps to solve this problem. It is similar to a regular buy stop, but it has a limit price that reflects the maximum price a trader is willing to pay for a share.
For example, if the stop price is set at $ 13.01, and the limit price is set at $ 15, then the order will be executed only under these conditions.
If the price turns out to be at $ 17 the next day at the opening of the session, such an order will not be executed, since the current price does not correspond to the limit.
