What Is Limit Order in Trading?

Whenever you trade on a freely-moving market, the way you specify a price you want is very important. It determines whether you can know exactly how much you spend/gain, how much you control your funds, as well as how fast your orders are fulfilled.

Limit Order is one of the two main order types in trading. It generally allows you to specify the exact price you want to sell/but your security for. If the market ever reaches that price, your order will be fulfilled. It’s beneficial because it allows you to stick to the plan regardless of the temporary market activity.

So, what is Limit Order for Forex?

What are Limit Orders?

What Is Limit Order in Trading?

Limit Orders (as in ‘order with a limit’) is a common way of placing orders. Orders are basically your requests to either buy or sell a security. When you buy something, you place an order for it, same for selling.

So, to give you more control over your own bid/ask activity, many brokers implement various order types. There are as many types as their imagination can allow, but you’ll generally see just two, as well as their variations:

  1. Market Order
  2. Limit Order

Basically, when you place a Market type order, you allow your securities to be sold at the nearest market price. Naturally, you may have to wait a few moments, but this process is usually nearly instantaneous, especially if there is high liquidity.

The limit type is a bit different: you choose your price. Should the security cross that line, it will be bought or sold. In some sense, it’s infinitely better. However, one can also see flaws in this system. But let’s focus on the merits of the Limit Orders for a moment. What is Limit Order in terms of efficiency?

Merits

Buy Stop Limit Orders are very helpful if you have some sort of plan or at least a strategy that needs adhering to. Nonetheless, people don’t always rely on that. When they do, however, it pays off dramatically.

Firstly, you can always control your losses and gains. Of course, there will be spreads and commissions, but you can always count them and anticipate your losses more or less accurately. That allows you to maintain a budget and think your investment strategy through with much better efficiency.

Secondly, if you have an investments strategy or a plan, you’ll need Limit Orders. Controlling what you sell and buy is essential because selling a security to buy a few others at exactly the price you want is what you need Limit Orders for.

Thirdly, there is a great automation potential in this. With Market Orders, you’ll have to monitor what’s going on in the market and see whether the price reached your desired point or not. Then, you’ll have to place an order manually. With Limit Orders, you can simply place an order and leave the market for even several months.

This leads to the great moments when you know the price will be reached in a few hours, place an order and just leave. If the liquidity is good enough when the price is reached, then your order will be fulfilled. All you need to do is know how to place Stop Limit Order, and you’re good to go.

Lastly, you can always change your mind. If you buy something with a Market Order, you often don’t have time to cancel the Order because you request to buy/sell the security at a market price, which is the current price, and that means a few moments of waiting. 

If the market is not liquid, then you’ll be able to wait longer, but with the Limit Order, you get as much time as you want (given, of course, that the desired price won’t be met sooner than you expect).

Flaws

Naturally, there wouldn’t be more than one type if all you needed is just a Limit Order. It may not fit your own style in many instances.

Firstly, you need to understand where the market moves. If you don’t, you’ll just place an unattainable order and forget about it or get frustrated that it’s not fulfilled by mealtime. Limit Orders are good if you place an order within a possible spectrum of prices.

Secondly, by the time the price is reached, your opinion may change. Limit Orders are fantastic if you know the price will be reached a bit later, but if this ‘later’ is a few days away, these orders often turn into hollow requests that either don’t get fulfilled or stay up until you scratch them.

It’s not a big deal, admittedly, but these moments slightly defeat the point of requesting an order for the specific price.

Thirdly, automation is just as dangerous as it is effective. If you leave the Limit Order for a few hours, it may simply be ignored by the exchange. The reasons are many: the supply can dry up, the malfunction can occur, and so forth. You may want to check in on your Order once in a while.

In conclusion

These flaws and merits don’t indicate that Limit Orders are objectively bad or good. Some of these statements can be true or false for your specific style. The task here is to find the type that fits your style of trading better. If you decided that Limit Orders aren’t for you, it’s not a loss. Use Market Orders, they are just as legitimate.

Hopefully, now you understand the answer to “What is a Limit Order?” better.

Yes, I want access to free training

Written by:

author

Carolyn Huntington is an economist, professional trader, and analyst. She made her first big deal in her student years with a profitable investment in Facebook stock. Now the total experience of her trade is 18 years. Over the years of trading, Carolyn has developed its own strategy that allows even those who have never traded on the stock exchange before to earn money. She also creates market forecasts and advises major shareholders, compiles investment portfolios, and teaches how to work with automated advisors.

telephone: 503-547-5192