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My understanding of a buy stop is best described with these steps:

  1. Price is at $100
  2. I place a buy limit at $110 with no take profit or stop loss
  3. I place a buy stop at $120

Here is where my understanding needs help… Is this what happens next?…

  1. Price reaches $120 and the buy limit position is closed, making me a profit

Is this a correct and proper use of a buy stop?

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  • "day-trading" & "noob" - better start with a fictional account, or else you'll be losing a lot of real money. From your question and also the comment on the answer, it seems you don't understand what a position is - you get them confused with orders.
    – MSalters
    Commented Sep 12, 2022 at 13:30
  • I'm beyond cautious, hence the terms used in the post title. Wouldn't dream of putting anything approaching real money in the firing line until I understand these things, also hence the existence of the post.
    – Matt W
    Commented Sep 12, 2022 at 13:47

2 Answers 2

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A "buy stop" buys a position - it does not close a "bought" position. In general a "buy stop" would mean "buy if the price goes above X", but in your example it would buy additional securities, not sell the ones you have.

If you have bought a security and want to sell it when it goes above a certain price to lock in profit, you would use a "sell limit" order, which means "Sell at this price but no lower".

"Stop" orders (more accurately called "stop-loss" orders) are used to try and prevent losses from getting too large. If you are long a security, then a "sell stop" order would be more appropriate, as it means "sell if the price goes below this threshold". It does not guarantee a specific price, but unless the drop in price is incredibly swift it's typically very close to the stop price.

So a "buy stop" would be use to limit the losses on a short position, buying the security to close out the short position.

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  • The description of a sell limit order is the problem: A sell limit also does not close a previously opened position, to my current understanding - it is opening a new position when price moves to a certain level. Yes? There is no order which closes a previously opened position, only orders with certain rules about when the position is opened (and later closed.)
    – Matt W
    Commented Sep 12, 2022 at 4:26
  • I don't believe either are restricted to only "open" orders - where are you seeing that? In any case, if you own stock and then execute a sell order, your broker will either sell the shares that you own (closing that position) or leave you with long and short positions that cancel out. The latter would be odd to me.
    – D Stanley
    Commented Sep 12, 2022 at 13:02
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    @MattW: A sell limit order is a conditional order. Creating the order does not close your position. The execution of the order does, assuming of course the size of the order matches your position. If you have 100 shares and have a stop-loss order to sell those 100 shares when the price drops below $50, the position is closed only when the price does drop that far.
    – MSalters
    Commented Sep 12, 2022 at 13:33
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A buy limit is usually placed below the current market price of the underlying position as you wanted to buy when only the current price drops to the limit you want to buy. For example, you can place a buy limit at $90, and it will be triggered when the current price of $100 drops to $90. A sell limit is usually placed above the current market price of the underlying (e.g., $120). If you want to make a profit, you can place a buy limit at $90 and sell limit at $120, and if the market price drops to $90, the buy limit is triggered and you buy at $90. If the underlying rises to $120, the sell limit order is triggered, netting you a profit of $30.

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  • This description sounds slightly strange. You can just place a normal buy order for $90 when the price is at $100. It doesn't need some kind of trigger, it's just on the books waiting for sellers at that price. Same with sell orders; those can sit on the opposite side waiting for buyers. The "limit" doesn't add anything.
    – MSalters
    Commented Sep 12, 2022 at 13:38

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