What is Above the Market?
Above the market refers to an order to buy or sell at a price higher than the current market price. The most common above the market order types include limit orders to sell, stop orders to buy, or stop limit orders to buy.
- Above the market refers to a price or order that is above the current market price.
- Common above the market order types include limit orders to sell, stop orders to buy, and stop limit orders to buy.
- The opposite of above the market is below the market, where a price or order is below the current market price.
Understanding Above the Market
Above the market orders are often used by momentum traders that want to trade in the same direction as the prevailing trend but need to wait for the price to continue moving in the trending direction to trigger their order to buy or sell.
For example, a momentum trader might place a buy stop order (or a buy stop limit) above a key resistance level to buy the stock once it breaks out. Should the security's price break through the resistance level, the investor may be able to participate in a subsequent upward price move.
Another example may be a that a person buys a stock expecting it to go higher. They place a sell order at a price that will give them a nice profit. Since that sell order is above the current price, it is above the market.
Short sellers may also use above the market orders to strategically enter short positions. For example, a short seller may believe that a stock will be overvalued once it reaches a certain point. Maybe the stock is trading is at $80, but if it gets to $90 the trader thinks it will be too overvalued to keep going higher. They might place a limit order to sell (short) around $90, in this case, to automatically initiate a short position without having to worry about constantly keeping an eye on the stock.
Traders often pair above the market orders with various forms of technical analysis. For example, a trader may identify a trigger point when looking at a chart pattern and use that trigger point to either enter or exit a long position.
The opposite of above the market orders are below the market orders, which are placed when a trader or investor wishes to purchase a security at a lower price or they want to sell below the current market price. These order types include limit orders to buy, stop orders to sell, and stop-limit orders to sell.
Above the Market Order Types
Below are the most common above the market order types, along with how they are used.
- Limit Order to Sell: A trader or investor that already owns shares may place a limit order to sell at a price higher than the current market price. These are also known as take-profit orders (T/P) since the trader or investor is locking in profits. A sell limit order may also be used to enter a short position if the price moves up to the order price.
- Stop Order to Buy: A trader that is waiting for a security to break through a key resistance level may place a stop order to buy at a price higher than the current market price and above the resistance level. They only want to enter if the price has enough momentum to reach the order and/or breakthrough the resistance.
- Stop Limit Order to Buy: A trader that wants to purchase shares at a specific price, but no higher, can place a stop limit order to buy, which makes sure that they don't pay unexpectedly high prices due to slippage. Assume the same situation as the stop buy order, but the investor is scared of paying too much if the stock gaps above the resistance level. Therefore, they place a limit on their stop order controlling the price they will pay.
Example of Using an Above the Market Order
Assume a trader sees a bottom process in Alphabet Inc. (GOOG) marked by a cup and handle pattern. The trader likes this pattern and views it as an opportunity to buy once the handle nears completion. The price consolidates within the handle, trading below $1,120 for several days.
They devise their strategy and place a stop limit buy order at $1,121. $1,121 is the trigger price meaning the stop order portion of the price will be triggered at this level. But the trader wants to control how much they pay, therefore they limit the price they will pay to $1,122. That means if the price moves above $1,121 they are willing to buy any shares available between $1,121 and $1,122, but no higher.
The price moves above $1,121 and the order is filled, assume at an average price of $1,121.30. If the price would have gapped above $1,121 and opened the next day at $1,125, the trader would have received no shares because of their buy stop limit order. If they used a regular buy stop order (no limit), they would be buying at any price above $1,121 which means they would have bought at $1,125.
The price didn't gap higher though, and so the trader was filled with their buy stop limit at $1,121.30. Now that they know they have a position, they place another order to exit at a profit. The trader believes the price will try to move up to test the $1,200 region. They place a sell limit order just below that at $1,195. At the time this order is placed the price is near $1,121, so an order at $1,195 is above the market. The price proceeds higher and eventually hits the trader's sell order at $1,195, closing out the trade for a profit of $73.70 per share.