Definition: A buy limit order is a type of limit order. To specifically buy a security at an exact price or below. In other words, the exact price would be a price you the trader are willing to pay at most. Using a buy limit order will make sure you don’t pay more than your specified price. You get a price guarantee so you pay the least amount possible. In the long term, you save money and increase profits. However, there is no guarantee that your order will be executed. If the market price doesn’t come down to the exact price you specified, your order will not get executed.
Types of Limit Orders
How To Use A Buy Limit Order
The definition of a buy limit order can be confusing. To gain a better understanding we should implement in an example using stock charts and technical analysis. There are many situations where you might want to implement a buy limit order. To narrow it down, we will use one example here. In this post we will cover using a buy limit order in situation pertaining to Breakout Theory. Buying stocks on breakouts into new highs, and chart patterns.
As you know when you buy a breakout stock is ready to move very high and very fast. It is at a tipping point. It’s moment to make the trade. It Volatility rises and price action gets violent. Getting a good execution on a stock trade can be difficult. You know that Execution is not Guaranteed with a limit order, so we must pick a specific price that will give us the best chance of getting executed.
Buy Limit Order Example
Lets look at he stock chart of ARMH Arm Holdings chip designer for the Apple Iphone. It’s been a dog for quite some time. In the past 5 months it’s been trading below all time highs. Instability in the US economy, election season, and talks of the fiscal cliff have weighed down the stock price. However, the companies fundamentals a are intact and showing growth in sales and future estimates.
The waiting game ensues for the next 5 months and during that time, the stock forms a very powerful technical pattern. The cup and handle pattern has formed which is a great, then in the following weeks a new high is made crossing the support and resistance line at $30. This is a technical breakout and a point of entry.
At the open, the stock spiked to $32 and is trading intraday between $30 and $32. Should you want to make a trade and get the best price you would set your buy limit order to be executed between these two numbers. Realistically speaking, you should set the buy limit order at $31 to ensure that the trade goes though. It’s important to realize these are just some guidelines. Try not to be exact. Setting a buy limit order at $32 would be exact, but the chances of execution are lower. Yes it might go through but, missing a trade opportunity like this would have cost you profits big time. ARMH make a huge run, and at the time of this writing, the trend is still continuing.
Try not to be Greedy or Fearful. It’s a mind game.
Take a close looke at the stock chart, notice that the stock closed at $28 the day before. So, at the open the stock has moved $4, or 14% in one day of trading! That is a huge move and those who don’t understand breakouts may think the stock has peaked. Amateur traders may think they can set at buy limit order at the $28 dollar level. The chances of your order getting executed is almost zero. The following days of the stock shows it climbing higher and higher. It’s can be stressful to enter into a trade after it has made such a significant move. As you can see, after the breakout the stock kept going up.
Use the Intraday Chart to Set Buy Limit Order Price
Another helpful tip in setting your buy limit order is to analyze the intraday chart. So, on the day of the breakout you want to look at the days trading range. Set your chart in increments of 5 minute bars or or 1 hour bars. Then you want to also look for price patterns, breakout points, support and resistance levels. Be sure to brush up of your technical analysis.
$1000 dollars a day saved on a Buy Limit Order
Some might think traders make a fuss over a couple of points. Other traders may not use buy limit orders. When it comes to preserving your bank roll, a limit order should be used. If you make the calculation of a trade of 100 shares at $31 and $32, you can see that the difference saved is about $100. Some active traders can trade up to 10 times a day or even more. Hypothetically speaking this would amount to about $1000 a day!!!! Start using buy limit orders when you trade stocks. This is just but one of the many tools to help you make money in the stock market.