Buy-Stops Above - Explained
What are Buy-Stops Above?
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Table of ContentsWhat are Buy Stops Above?What are Buy Stops Above?Stock Movement Following a Resistance Breakout Academic Research on Buy-Stops Above
What are Buy Stops Above?
Buy Stops Above is a form of trading strategy where an investor is of the view that the price of a stock will increase at a certain point of time after it passes a certain phase of resistance. In this strategy, an investor prefers to place a buy stop order at a price that is a bit more in comparison to the resistance level. A resistance level usually arises when sell limit orders concentrate at a specific price. It is a way of holding a huge market sentiment for the given price ceiling of a stock.
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What are Buy Stops Above?
Buy stops above analyzes fluctuations in stock prices and the areas of resistance and support. Resistance and support theory are based on the assumption that the price of a share is regulated between resistance (having an upper hand), and support (with a lesser bracket). One can see these barriers on a chart with two different lines, one for support and the other one for resistance. The concentration of limit orders taking place at the given prices makes both the lines visible. Talking about the upper hand, investors place either too large or too small of sell limit orders at a specific price, while on the lower hand, investors place a huge quantum of buy orders in order to form a falling obstacle for the price of share. When the price of a share moves towards the level of resistance, that is upper bracket of price, the buy stops above investment strategy comes into the picture. When the share price comes at that level, the intense sell limit orders will be affected. In this manner, the price of share falls beneath the line of resistance. According to a theory for the buy stops above strategy, the price of share will increase. An investor or a trader will use buy stop theory when the price starts increasing so as to buy shares.
Stock Movement Following a Resistance Breakout
As per the buy stops above technique, a stock needs to be reassessed when the movement of a stock goes above the line of resistance. When the market supply is more than the market demand, that will be the price point presented by the line of resistance. This situation gives a downward push to the price of a share. When the price exceeds that line, breakout takes place. And it stays in the higher bracket until the market reassesses the stock. The previous buy stop level can convert itself into an amazing sell limit order by being a good level of support ahead.