Sometimes you do not want to buy or sell an asset at the prevailing market price. Maybe the price is too high for you to buy at or too low for you to sell at, during situations like this, a limit order comes in handy.
A limit order is a type of order that specifies the maximum price (to buy) or the minimum price (to sell) at which you are willing to buy or sell an asset.
A limit order allows you to have control over the price at which you enter and exit the market. However, limit order has its disadvantages and we have explored all you need to know about limit order in this article.
A limit order is a strategic instruction you give to your broker to buy or sell an asset at a specific price that is better than the current market price.
When you place a buy limit order, you are setting a maximum price that you are willing to pay for a security. The order will be executed once the price reaches or drops below the specified limit.
Sell limit order on the other hand involves setting a minimum price at which you are willing to sell. The order will be executed only if the market price rises to or exceeds the predetermined limit.
The limit day order and Limit Good till cancel order are used to set the duration of the limit order. For example, if you set a limit buy or sell order using a limit day order, it means that by the end of the trading day, the limit order will be automatically cancelled if it has not been filled.
On their other when you set a buy or sell order using limit good till cancel order, the order will remain active until it is filled or until you cancel it manually.
Limit order allows investors to navigate market fluctuations and potentially secure more favourable prices.
To properly understand how limit order works, here are some examples.
Buy Limit Order Example
Let’s say you want to buy 10,000 Tsela shares, but the current market price per share is $799 and you believe it’s a better deal if you can buy at $680 per share. So you place a buy limit order at $680 using Good till cancel order. If the market price reaches $680 or lower the order will be triggered and you will buy Tsela shares at or below the specified price.
Sell Limit Order
Imagine you bought Tsela shares at $720 per share and after holding it for some time you wish to sell, but the current market price is at $735 and you believe you can make more profit if you wait for the price to reach $750. So you set a sell limit order price of $750 or higher. You sell order will be executed once the market price reaches $750 or higher.
Limit order allows you to set specific entry and exit points based on your analysis and strategy.l, however in real market conditions, limit order has some disadvantages.
The major disadvantage of limit order is that there is no guarantee that the order will be executed. If price never gets to the point you have set, your order will never be triggered and you may miss out from opportunities to make profit.
For example, in the sell limit example above, if you bought at $720, the current market price is $735 and you set a sell limit order price of $750, hoping to make more profit, it is possible that price will begin to decrease after hitting $740 and your limit order will not be triggered and you have missed out from selling when price was $735 – $740.
Before using limit order, it is important to analyze the market trend and choose an optimal limit order price.
Final Word
A limit order can either work to your favour or against you, depending on how you use it. It is important that you monitor the status of your limit order and assess whether adjustments willbe needed based on evolving market dynamics.
Also keep in mind that understanding the reason why your limit order was not executed can help in your future trading strategy.
A limit order .at be worth it, depending on the situation. For example, if you want precision control over you entry and exit price, and you are looking to avoid slippage, limit order may be worth it. Limit order also saves you the time of consistently monitoring the market since you have automated your trade.
However, limit order may not be worth it in a fast moving market because price can quickly move away from the limit you have specified, making you miss profit opportunities.
Limit order exposed you to the risk of not having your trade executed. If the market does not go in your favour, your limit order price may not be reached as such it will not be triggered.
If a limit order is not executed, it means that the market did not reach the specified limit price during the order’s validity. If you use a limit day order, the limit order will automatically be cancelled after the close of the trading day, however if you use a good till cancel order, the order will remain valid until it is triggered it until you manually cancel the order yourself.
Note that a good till cancel order can remain valid for between 30 days to 90 days depending on what your broker allows.
The main difference between limit order and stop loss order is in the purpose and execution condition.Limit order is placed to buy it sell a security at a specific price or better, and the order will only be executed at the specified price or a better price.
Stop loss on the other hand is designed to limit potential losses by automatically triggering a market order when the stock reaches a certain price. A stop loss order is triggered once the specified stop price is reached resulting in execution at a less favourable price.