Beat the market with a stop buy order

Think of orders in the stock market as your strategy. The stop loss order is type of order and many investors are familiar with how a stop loss sell order is used. But there's another version of a stop order you may consider. Here's how it works.

The stop buy order can transform your portfolio and make you a master of the markets.

Related: See when it is highlighted for use in real time stock market conditions.

First let's define the stop order so we know what stop actually means. Basically, the idea is you stop and get an order filled (executed) when the market price moves to your specified (limit) price. The stop loss (sell) attempts to halt a down trend from continuing in the portfolio. Conversely, a stop buy order starts a position in the portfolio when the order is filled.

The stop buy order should be called a Go Buy order!

In a stop buy order you pre-determine a buy of the chosen security in the event the price keeps rising. For example you are considering buying a stock or E.T.F. but you're not sure about what to do or you're spooked. Here's how you might use the Go buy order (o.k. it's a stop buy).

Scenario: the stock market has been weak but may be on the rebound. The challenge with buying in this scenario is fear is prevalent. We could use a stop buy for anything that may go higher but it can also be used to acquire downside protection using an inverse E.T.F. or the volatility index (VXX). In our scenario we could have a move in either direction as certainty about the price trend, short term, is low.

How to execute a stop buy order

Go into your online account and set up an order for VXX and enter the number of shares. The strategy is to acquire downside protection in the event selling resumes and fear rises. Continue with the order by opening up your order options and choose stop. See figure 1.

In figure 2 you are entering the stop price which is the price you want the order to be executed on. Note, once the market reaches this price your order becomes a market order and will be filled at the next best price. A stop limit may also be available which, if you choose it, specifies a limit to how much you would pay for the buy (and not get it filled).

Figure 1. Set up a stop BUY

Figure 2. Enter the stop price and enter the BUY order.

Figure 3: how the price was determined.

You can see the current day's intra-day price range and the current price. The decision is to buy IF the price pushes higher. A stop price close to the current price was used in the event the price pushed higher late in the session (thereby acquiring the position and avoiding the possibility of a large price increase at the start of the next session). The current price is $47.56 (see the green arrow).