Limit Order

What is a Limit Order?

A limit order is an order type that is used to either buy or sell a security at a specific price (limit) or fast at the best possible price (market). It provides traders with control over the price at which they are willing to enter into a position.

If you use a buy limit order, the trade will only execute if the price of the selected asset trades at the limit price or lower.

In contrast, a sell limit order will only execute at the limit price or higher. This allows traders to avoid unfavorable entries compared to a market order, which executes at the best available market price.

Types of Limit Orders

The buy limit order and sell limit order are the two types of limit orders used.

  • The buy limit order is used to define the price at which investors want to buy an asset. A buy limit order is an order type used to buy a security at or below the chosen price limit. That can be to open a new long position or to close an existing short position.
  • The sell limit order is used to define the price at which investors wish to sell an asset. A sell limit order is an instruction to sell a security (e.g., stocks or options contracts) at or above the specified price limit. That can be to get out of an existing position or to open a short position.

Within these, there are variations in terms of how long the order will be valid:

  • Day orders, which expire at the end of the trading day if not executed
  • Good-till-canceled orders, which remain active until executed or manually canceled
  • Individual validity orders are where you define the exact date of how long the order will remain active if not executed.

I don’t want to over-complicate things here, but there are more variations of order types that include a price limit. Those order types are stop limit orders in the form of a buy stop limit and sell stop limit order. I’ll get into that in more detail in a separate article.

Limit Order vs Market Order

Unlike a limit order that provides price control, a market order executes immediately at the best available market price.

This means with a market order, you may get an unpleasant entry price, especially in fast-moving or illiquid markets.

Limit orders help mitigate the risk of a bad execution but have the disadvantage of non-execution if the price never reaches the limit price.

I see it this way:

If you want to open a position at a specific price, and it is acceptable to you that the trade might never get executed at your limit price (so the price has a higher importance to you), then the limit order is just perfect.

If you want to open a position as fast as possible without caring about the trade execution at all, then the market order is the best way to go because the likelihood of trade execution is about 100%.

Advantages of Limit Orders

The most significant benefit of using limit orders is the control over entry/exit prices, which protects traders from adverse price movements.

It helps control potential losses and lock in desired profits. Limit orders also enable setting target entry prices, unlike market orders.

However, the trade-off is that limit orders may not always get filled if the asset price never reaches the limit price.

How to Place a Limit Order

Most trading platforms and brokers have a “Limit” option when placing orders, along with the ability to specify the limit price level.

Details like order duration (Day, GTC, etc.), order quantity, and other instructions need to be entered.

Some platforms offer advanced order entry tools like dynamic updating of limit prices based on market conditions.

Almost any platform offers this type of order entry since it is the most basic and most common type of opening a position, be it as a trader or investor.

Limit Order Examples

For example, if XYZ stock is trading at $101, a buy limit order can be placed at $100 to try to get a better entry price than the current market. Or a sell limit order can be placed at $105 for a stock currently trading at $104.5 to try to sell at a higher price point.

Limit orders just sit on the order book until the limit price is reached. If the price is reached, the order gets executed with the number of shares that could be matched between the buyer and seller.

If you only get a partial fill due to a lack of liquidity, your remaining order will continue to stay in the order book.

Risks of Limit Orders

While limit orders control pricing, there is the risk of non-execution or partial fills if the price never reaches the specified limit price level, especially in illiquid securities.

There may also be slippage from the limit price at times of high volatility. Improper limit pricing could also mean missing out on tradable opportunities. Therefore, traders need to be prudent in setting reasonable limit prices aligned with their trading goals.

Alexander Voigt, CEO
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Alexander Voigt is the founder of DayTradingZ, was a regular contributor to Benzinga and has been featured and quoted on leading financial websites such as Investors.com, Capital.com, Business Insider and Forbes.