The Trading Bible Trading Guides Limit Order - What is it and How to Use it?

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

By Stefano Treviso, Updated on: Apr 07 2023.

Table of Contents:

• Limit Order Explained
• How to set a Limit Order
• Advantages of the Limit Order
• Disadvantages of the Limit Order
• When should you use a Limit Order?
• Common Limit Order Mistakes

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:

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:

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 be looking to buy 100 AAPL shares at $50
• The current price of those shares is $60
• If the price of the Shares slowly approaches $50 and immediately goes back to $51

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.

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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:

• If you’re buying then either at your specific price or CHEAPER.
• If you’re selling then either at your specific price or more EXPENSIVE.

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:

• Buy/Sell when the price is
• Limit Order

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

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

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:

• If the price of a share is $50 right now
• You’re willing to enter a buy trade only when it reaches $55
• Perhaps you believe that the asset breaks resistance at that point
• Limit orders only get you your desired price or BETTER
• In this case $50 is BETTER than $55 when it comes to BUYING
• Your limit order will be instantly executed as the equal or better condition is being met
• You just got into a huge mess, you wanted $55 but you bought at $50.

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:

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:

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:

• The ability to buy an asset ONLY at a specific price or better.
• The ability to sell an asset ONLY at a specific price or better.
• You won’t get executed if the exact price you set is not triggered. 

Disadvantages of the Limit Order

The main disadvantage of a limit order is:

• There is no guarantee that your order will get filled due to availability so you might never end up exiting your trade and the order will remain pending forever until you cancel it.

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:

• You want to buy an asset at a specific price or a better price.
• You want to sell an asset at a specific price or a better price.

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:

• Low liquidity assets can have huge price jumps due to lack of availability at each price level, so if the LIMIT order requires liquidity at each price level to be filled, this situation poses a huge risk for that order fill to happen.
• Highly volatile assets can make massive jumps in prices while skipping many levels. You could see an asset trading at $50 and 1 second later trading at the price of $60 without ever having gone by each level to climb up.  If you had a LIMIT order at $55 then that order got skipped, there was never a price level for it and it will never be filled.

Common Limit Order Mistakes

These are the most common mistakes when using limit orders:

• Trying to create LIMIT order for a BUY position by setting a price ABOVE the current market price (this mistake gets you instantly executed the wrong way).
• Trying to create a LIMIT order for a SELL position by setting a price BELOW the current market price (again, this mistake gets you instantly executed the wrong way).
• Setting LIMIT orders on prices that are extremely close to your opening price of your trade. You could end up paying commissions, spread or any other fees to open your trade and then your LIMIT SELL order to exit the trade gets instantly hit and all you did is lose money.
• Using limit orders on extreme volatility environments.
• Using limit orders on low liquidity assets.

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!