Limit Order

November 21, 2023 - Around 2 mins mins to read

Understanding the Concept of Limit Order

A limit order is a type of order that allows individuals to buy or sell a security at a predetermined or more favorable price. This order is commonly used in trading to give traders better control over the prices at which they execute their trades.

Buy limit orders are executed only if the security’s price reaches or falls below the limit price. Sell limit orders, on the other hand, are executed only if the security’s price reaches or exceeds the limit price. This feature gives traders greater control over the prices at which they buy or sell securities.

By using a limit order, an investor can ensure that they pay the specified price or a lower one when buying a security. However, it’s important to note that the execution of the order is not guaranteed. Limit orders are only executed if the security’s price meets the necessary qualifications. If the price doesn’t reach the specified limit, the order will not be filled, and the investor may miss out on the trading opportunity.

Limit orders are based on a pre-determined price set for buying or selling a security. For example, if a trader wants to buy a stock and has set a limit of $10,000, they will only purchase the stock if its price is $10,000 or lower. This concept also applies to cryptocurrencies, where a trader with 5 ETH will only buy another asset if it is priced at 5 ETH or lower. Similarly, when a trader wants to sell shares with a limit, they will not sell any shares until the price reaches the specified limit of $10,000 or higher (or 5 ETH or higher in the case of cryptocurrencies).

When using a buy limit order, the investor is guaranteed to pay the buy limit order price or a better one. However, there is no guarantee that the order will be filled. The advantage of using a limit order is that it provides the trader with more control over the execution price, especially during periods of high volatility when using a market order may be risky.