A buy limit order is a specific type of buy order used to enter a market, while a sell-stop order is a sell order that can be used either to initiate a short sell position or to close out an existing buy position.

A trader uses a buy-limit order to attempt to enter a market on the buy side at a specific price that he believes to be an advantageous entry point. For example, a stock may have advanced in price from $30 to $50, at which point the market encounters resistance and begins to flatten out. The trader expects the market to retrace approximately 50% of its move upward from $30 to $50, so he places a buy-limit order to buy the stock at $41 a share or better.

The buy-limit order means that the order, if filled, will be filled at the specified price or better, but it does not guarantee that the order will be filled at all. It's important for traders to keep the bid-ask spread in mind when placing limit orders. A buy order will only be filled if the ask price falls to the specified limit order price.

When a sell stop order is triggered, it means selling at the best available price when the market trades at the price level (which must be below the current market price when the order is placed) specified in the order. A sell-stop order can be used for one of two purposes. It can be used either to initiate a sell position in a market or to close out an existing buy position. In the latter case, it is called a stop-loss order.

For example, if a trader has bought a stock at $35 a share, but wishes to risk no more than a $5 per share loss on the trade, then he places a sell stop-loss order just below the $30 a share level, perhaps at $29.50. If the market price falls to the $29.50 level or lower, then the stop-loss order is triggered, and the trader's stock is sold.

  1. How do I place an order to buy or sell shares?

    Read a brief overview of how to open a brokerage account, how to buy and sell stock, and the different kinds of trade orders ... Read Answer >>
  2. When is a buy limit order executed?

    Understand how buy limit orders work, and factors such as the bid-ask spread and market volatility that traders must consider ... Read Answer >>
  3. How do I place a stop-loss order?

    Learn how to place a stop-loss order and how traders use stop orders to either limit potential losses or to protect part ... Read Answer >>
  4. How can I prevent my limit order from not getting filled if the stock's price gaps ...

    You can minimize the chances of this situation happening if you understand two types of orders: the buy-stop order and the ... Read Answer >>
  5. How long does it take a broker to confirm a trade after it is placed?

    Learn about placing trades with a broker and the amount of time required to received confirmation of different types of orders. Read Answer >>
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