What is 'Buy Stops Above'

Buy stops above refers to a trading strategy based on an investor’s belief that a stock’s price will accelerate upward once it breaks through a level of resistance. To trade on this belief, the investor places a buy stop order at a price slightly higher than the resistance level. A resistance level generally results from a concentration of sell limit orders at a particular price point. As such, it is an expression of widely-held market sentiment about that stock’s price ceiling.

BREAKING DOWN 'Buy Stops Above'

Buy stops above is a technique based in the technical analysis of stock price movements and the concepts of resistance and its counterpart, support. Resistance and support theory operates on the assumption that a share price is often constrained between an upper barrier, where resistance comes into play, and a lower bracket, where support takes place. These barriers appear on a chart as the line of resistance and the line of support. Both lines are the result of a concentration of limit orders at those prices. On the upper end, investors have placed a disproportionate number of sell limit orders at a certain share price. On the lower, a large number of buy orders create a downward obstacle for the share price.

The buy stops above strategy comes into play as the share price approaches the upper end of the price bracket, known as the level of resistance. As the share approaches that level, those concentrated sell limit orders will be executed. This tends to send the price back downward below that line of resistance. If the price can survive that wave of selling, it will continue upward beyond the line of resistance. The buy stops above strategy is based on the theory that a share price will then accelerate upward. A trader acting on that theory will have a buy stop order in place to purchase shares as soon as the price begins its climb.

Stock Movement Following a Resistance Breakout

The buy stops above technique implies that a stock’s movement beyond the line of historical resistance signals a fundamental re-evaluation of that stock by the market. The original level of resistance suggested a price point at which market supply exceeds demand, placing downward pressure on the share price. Once the price has moved above that line, in what is known as a breakout, it is common for it to remain in that higher range as the market re-evaluates the stock. The former buy stop level may turn into an attractive point for a sell limit order as it can become a level of support in the future.

RELATED TERMS
  1. Breakout

    A Breakout is the movement of the price of an asset through an ...
  2. Support (Support Level)

    The price level which, historically, a stock has had difficulty ...
  3. Gather In The Stops

    Gather in the stops is a trading strategy of driving down a stock's ...
  4. Price Level

    A price level is the average of current prices across the entire ...
  5. Soft Stop Order

    A soft stop order is a mental price or percentage set by traders ...
  6. Trailing Stop

    A trailing stop is a stop order that can be set at a defined ...
Related Articles
  1. Trading

    Support and Resistance Basics

    Support and resistance are used by traders to refer to price levels on charts that prevent the price of an asset from getting pushed in a certain direction.
  2. Trading

    Stocks at Major Resistance - Breakout or Reverse?

    These are four stocks that both short and longer-term traders will want to keep an eye on.
  3. Trading

    Four Stocks For Range Traders

    These four stocks are locked in ranges, offering low risk and high reward opportunities if the ranges continue.
  4. Trading

    Trade on Support for the Best Exit Strategy

    Find your exit strategy based on support and resistance levels, while understanding the psychology.
  5. Investing

    Sell These Stocks Near Resistance

    These stocks are at or approaching major profit-taking levels, which could cause them to slip lower again.
  6. Trading

    Trailing-stop/stop-loss combo leads to winning trades

    Combine trailing stops with stop-loss orders to reduce risk and protect profits.
  7. Trading

    Three Stocks Trading Near Support

    These stocks are trading near support, signaling a potential long trade for technical traders.
  8. Trading

    Consumer Goods Stocks Flying Higher

    Some consumer goods stocks have been top performers over the last week. Here's their current performance, and what to expect going forward.(AAPL,MTOR,WNC)
  9. Trading

    How To Place Orders With A Forex Broker

    Learn how to set each type of stop and limit when trading currencies.
  10. Trading

    Maximize Profits With Volatility Stops

    Find out which type of volatility stop fits your trading objectives.
RELATED FAQS
  1. What is the difference between a buy limit and a stop order?

    Learn the difference between buy limit orders and stop orders, including stop loss orders, and understand the risks of the ... Read Answer >>
  2. What's the difference between a stop and a limit order?

    A limit order is an order that sets the maximum or minimum at which you are willing to buy or sell a particular stock. With ... Read Answer >>
  3. What are the rules for placing stop and limit orders in forex?

    The high amounts of leverage commonly found in the forex market can offer investors the potential to make big gains, but ... Read Answer >>
  4. How do I determine where to set my stop loss?

    Read about some theories on stop-loss placement and how traders use stop-loss orders to hedge against losses and capture ... Read Answer >>
Trading Center