Buy limit vs buy stop: what each pending order means

The four pending orders in one table

When you place a trade now, at the current price, it is a market order. A pending order waits for a price you set. There are two questions behind every one: do you want to buy or sell, and is your price better or worse than where the market is now? That gives four orders.

The simple way to remember it: a limit order is always at a better price than now (buy cheaper, sell dearer), and a stop order is always at a worse price, which you accept because you want proof that the market is moving in your direction first.

A worked example with prices

Say EUR/USD is trading at 1.0850. It has bounced from just above 1.0810 twice this week and turned lower just below 1.0890 twice. Four traders read the same chart differently:

• Buy limit at 1.0815. She expects support to hold again and wants to buy the dip, 35 pips cheaper than now. If price never falls that far, she never gets in.
• Buy stop at 1.0900. He thinks a break above the recent highs starts a new leg up. He would rather pay 50 pips more than now and only be in if the breakout happens.
• Sell limit at 1.0885. She expects the top of the range to turn price down again and wants to sell there, at a better price than now.
• Sell stop at 1.0800. He thinks a break below support turns into a slide and wants to be short only once it does.

None of them has to watch the screen. Each order sits on the broker's server until price reaches it or the trader cancels it, and most platforms let you set an expiry, such as the end of the day or the week. Each order can carry its own stop-loss and take-profit from the start, which is a good habit: the risk is defined before the trade even exists. The position size calculator sets the size from the distance between the entry and the stop.

How each order fills, and slippage

The two families fill differently, and it matters most in fast markets.

A limit order fills at your price or better. If EUR/USD drops straight through your buy limit at 1.0815, you are bought at 1.0815 or lower. The risk is not getting filled at all: price can come within a pip of your level and turn away without you.

A stop order becomes a market order once price touches the level, and fills at the next available price. On a calm day that is your price or a fraction of a pip away. Around a major release, or when the market opens on Monday after a weekend gap, it can be several pips or more beyond it; this is slippage. Some platforms offer a buy stop limit or sell stop limit, which triggers like a stop but refuses to fill beyond a limit price you set, at the cost of possibly missing the trade.

The stop-loss on an open trade is itself a stop order: the stop-loss on a long position is a sell stop below the market, and on a short it is a buy stop above. That is why stop-losses can slip in the same conditions.

Which order to use

The choice follows the idea behind the trade, not a preference for one order type:

• Buying a pullback in an uptrend or a bounce from support: buy limit.
• Buying a breakout above resistance or a range high: buy stop.
• Selling a rally in a downtrend or a rejection at resistance: sell limit.
• Selling a breakdown below support: sell stop.

A common mistake is placing a buy limit above the current price, which most platforms reject or fill at once as a market order. If the platform will not accept your order, check whether you picked the limit or the stop for the side of the market your price is on.