Limit Order - What is it and How to Use it?

Updated Jan 31 2021

Limit Order - What is it and How to Use it?

Table of Contents:

Limit Order Explained

A Limit Order is a trading order created to automatically buy or sell an asset only at a specific price or better. This means that ONLY if the specific price you set is reached, the order will be triggered and filled with that particular price or a better one.

A limit order can be in either direction, you can place a BUY LIMIT order or a SELL LIMIT order. Let's see some examples:

If a particular stock costs right now $40 and you’re only willing to buy it at $30 or cheaper, you could create a BUY LIMIT order to meet those conditions, see the example below:

Buy Limit Order

If a particular stock that you own is trading right now at $40 and you’re only willing to sell at $60 or more, you could create a SELL LIMIT order to meet those conditions, see the example below:

Sell Limit Order

One of the most important things to keep in mind about LIMIT orders is that the execution is not guaranteed, it depends on the asset’s availability, here’s an example:

You could have gotten your order partially filled, maybe there were only 50 Shares available at $50.

That’s why LIMIT orders carry significant risk if they’re used when trading volatile assets or low liquidity ones.

How to set a Limit Order

This is the most important part of all the guide, it will save you a lot of suffering and confusion when setting limit orders.

LIMIT orders get you your desired price or BETTER. Which means that:

This means that you can only use LIMIT orders on those conditions, for buying an asset it needs to be either at the price or cheaper and for selling an asset it needs to be at the price or more expensive.

Setting a LIMIT order is as simple as navigating through whatever platform you have and before triggering your order choosing the option to make it a LIMIT order and set a price. Each platform can have this named in different ways, the most common are:

Here’s an example of setting a BUY LIMIT order:

Buy Limit Order Placement

Here’s an example of setting a SELL LIMIT order:

Sell Limit Order Placement

Now, what happens if you want to enter a buy trade once an asset CLIMBS past a certain price? Using a limit order would be impossible, and here’s an example of why:

All of this happened because we used the wrong type of order. Some trading platforms won’t allow you to enter the order if it’s set in a wrong way, other more professional trading platforms will do exactly as you instruct them, so if you tell them wrong, it may cost you a lot of money.

Good trading platforms for beginners to intermediate traders will prevent this from happening by blocking you from placing the wrong type of order.

Here’s an example of us trying to set a BUY LIMIT order when the price is ABOVE the current price:

Buy Stop Order

As you can see in the example above, the BUY LIMIT order is not accepted and automatically gets converted into a BUY STOP order due to the price being higher than the current price.

Stop orders work just like market orders, once the stop price is reached a market order gets activated and gets filled at whatever price is available. Never confuse them with limit orders. 

Here’s an example of us trying to set a SELL LIMIT order when the price is BELOW the current price:

Sell Stop Order

As you can see in the example above, the SELL LIMIT order is not accepted and automatically gets converted into a SELL STOP order due to the price being lower than the current price.

Using LIMIT or STOP orders is fairly simple, you just need to memorise their criteria for execution and always double check before inputting an order. If your trading platform is a fully capable pro trading suite, most likely they won’t correct your mistakes and your order will be executed as you said!

Advantages of the Limit Order

The main advantages of a limit order are:

Disadvantages of the Limit Order

The main disadvantage of a limit order is:

As we usually say, an order by itself can’t really have disadvantages if the trader choses to use it for the right purpose.

When should you use a Limit Order?

There are two cases where you’ll want to use a limit order:

The most important thing when using limit orders is to make sure you’re using them on liquid assets and out of extreme volatility periods, here’s why:

Common Limit Order Mistakes

Order Mistakes

These are the most common mistakes when using limit orders:

Try to avoid making these mistakes, remember, the key to using something lies on fully understanding it before hand.

Now you’ve learned almost everything there is to know about using a limit order, a new weapon in your trader toolkit. 

Enjoy!

Author

Stefano Treviso

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