2024.04.30
2023.10.16 Limit Order — What Is It & How Does It Work?
Artem Parshinhttps://www.litefinance.org/blog/authors/artem-parshin/
When traders take their first steps in trading, they are immediately introduced to technical analysis and the concepts of limit order and limit price.
The ability to work with limit orders increases trading efficiency and also allows traders not to waste time waiting for the best price by automating the process. Limit orders help to avoid difficulties associated with market volatility and instrument liquidity.
The article covers the following subjects:
- Key facts
- What Is a Limit Order?
- How Does Limit Order Work?
- Why the difference between ask and bid matters for limit orders
- Limit Orders vs. Market Orders
- Limit Orders vs. Stop Orders
- Limit Orders vs. Stop-Limit Orders
- How To Use a Limit Order
- Advantages of Limit Order
- Disadvantages of Limit Order
- Limit Order Examples
- Conclusion
- Limit Orders FAQ
Key facts
a limit order is a request to a broker, suggesting the opening of a trade in the future at a specified price;
a limit order is more effective than a regular market order and is always triggered at the most favorable price for the trader;
working with limit orders allows traders to save a lot of time, as it can automate the trading process;
- working with limit orders allows traders to use the most effective investment strategy of technical analysis and the most profitable patterns.
What Is a Limit Order?
How often, when trading on Forex or another exchange, do you realize that once the price reaches a certain level it will reverse, but nothing can be done because there is no time? This problem is easily solved by setting a limit order.
A limit order is a market order to buy or sell at a predetermined price. In other words, you can set a sell or buy order anywhere, and when a certain price reaches it, it will be triggered, opening a trade without the trader's participation.
How Does Limit Order Work?
The principle of operation of a limit order is to open a trade in the future according to the required parameters. Once placed, the limit order is inactive. But when the market price reaches the limit order level, it is triggered, and the trade becomes active.
In other words, if you expect the price to be at the level of 100 and then reverse and fall, you can set a limit order at this level. If successful, a sell position will be opened. Opening purchases works similarly.
Buy limit order
The principle of operation of limit buy orders is described below.
Go to your client profile and open the “Trade” tab with the required instrument.
Open the chart and determine the level at which you will enter purchases.
Since the current price is higher than the set level, choose the “At the price” option.
Choose the type of operation "Buy".
Next, set the price at which the order should be triggered.
Select the trade volume.
At the end, click “Buy”.
Once installed, the limit order will appear in the list of current transactions. It is not active until the market price has reached a set level.
After the current market price drops to the level of the order, it will be triggered, and a buy trade at the set price will be opened instead. Further, order management will be the same as for a regular buy trade.
Sell limit order
The principle of operation of limit sell orders is described below.
Go to your client profile and open the “Trade” tab with the required instrument.
Open the chart and determine the level at which you will enter sales.
Since the current price is lower than the set level, choose the “At the price” option.
Choose the type of operation "Sell".
Next, set the price at which the order should be triggered.
Select the trade volume.
At the end, click “Sell”.
Once installed, the limit order will appear in the list of current transactions. It is not active until the market price has reached a set level.
After the current market price rises to the level of the order, it will be triggered, and a sell trade at the set price will be opened instead.
When working with limit orders, pay attention to liquidity and slippages. If the market fluctuates strongly, the actual sale or purchase price of an order may differ from the price at which it was placed.
Why the difference between ask and bid matters for limit orders
There are many factors to consider when working with limit orders. For example, slippages. There is also the problem of a sharp expansion or narrowing of the difference between the Bid and Ask prices.
Inexperienced traders often do not take into account that buy limit orders are opened at the Ask price and sell orders are opened at the Bid price. Bid and Ask levels are determined by the current supply and demand on the exchange.
Often, when important macroeconomic news is released, the gap between the Bid and Ask prices widens more. In case your limit order falls into this gap, it may not trigger at the price you set. You can also observe how the Ask price has already risen above the level of your order, but the sell order itself has not worked out. This happens because the Bid price was lower.
Of course, this only applies to short-term trades. When working on timeframes starting from daily and higher, the difference in Ask and Bid prices is not as important as on M5 or M15.
Limit Orders vs. Market Orders
A limit order is an order that will be opened not right now, but in the future, at a predetermined price. A market order is a regular trade that is opened right now at the nearest price available on the market. Both order types have pros and cons.
Speed of execution is an advantage of a market order. There is no need to wait until the indicated price reaches its level. Brokers can open an order at the first available price. The disadvantages include the frequent discrepancy between expected and actual prices. While brokers are processing the order, the favorable price in the market may change and it may be opened at a disadvantageous price.
The advantage of limit orders is that they don't depend on price fluctuations. Until the market reaches the order level, it does not trigger, but when it does, the price will be as close as possible to the desired one. The fact that the order may not be executed at all is a disadvantage. This is possible if there is a price gap and the desired price is unavailable in the market.
Limit Orders vs. Stop Orders
A stop order is a restrictive order. It is required to get rid of the transaction when unfavorable conditions occur or take the desired profit.
For example, you set a Buy Limit at a price of 100, and it worked out, but the stock price did not begin to rise but continued to fall. To avoid losing your entire deposit, you can set a Stop Loss at 90. When the minimum price reaches 90, it will be triggered, and the trade will be closed, which will prevent further losses.
There are two types of stop orders: Stop Loss and Take Profit. You can set them both on an open market order and on a limit order before it is executed. If Stop Loss limits risks and losses, then Take Profit is needed to take profit. If you set both Stop Loss and Take Profit for a limit order, the position will be fully automated and will be executed without your participation. You will only receive the final result in the report.
Limit Orders vs. Stop-Limit Orders
It is a completely different matter to compare limit and stop-limit orders. Both are pending orders and are triggered at a set price in the future.
Based on their triggering, they can be divided into orders that continue the trend and orders that reverse the trend. Limit orders are reversal orders since the Buy Limit is a purchase when the price falls and the Sell Limit is a sale when the price rises. For the Buy Limit to work out, the price must fall to its level, and for the Sell Limit to work out, the price must rise to it.
Stop-limit orders are trend-continuing orders. Buy Stop is a purchase after a rise, and Sell Stop is a sale when the price falls. For a Buy Stop to work out, the stop price needs to rise to its level, and for a Sell Stop to work out, the stop price needs to fall.
How To Use a Limit Order
Let's summarize and learn how to use limit orders.
Although limit orders provide entry into a trade at a better price than a market order, the main reason for using them is to save time. Using limit orders, there is no need to spend several hours on the platform waiting for entry into a trade. Limit orders are necessary to automate the trading process and reduce the psychological impact on traders.
Pattern trading, one of the most popular technical analysis sections, is impossible without limit orders. For example, when trading inside a channel, where trades are made between resistance and support lines, traders choose between Buy Limit and Sell Limit orders.
For example, the price has approached the resistance line, and a reversal is about to occur. Let's set the Sell Limit at the level of a possible reversal, and when the limit price reaches this level, a sell trade will be opened. When the price approaches the support line, it is reasonable to place a Buy Limit order, which will open a buy trade. You can also set stop orders for each order, which completely automates the trading process.
How to Set Limit Orders
Let's figure out how to set a limit order in the MetaTrader trading terminal.
To place an order, click the “New Order” button.
In the order setup window, set the required trade volume.
Next, change the order type to “Pending order”.
Next, select the required order: Sell Limit, Sell Stop, Buy Limit, or Buy Stop.
Then, set the price at which the order will be opened.
At the end, click “Place”.
The order will appear in the “Terminal” window. When the conditions are met, the trade is activated.
Advantages of Limit Order
Let's look at the advantages and disadvantages of limit orders. A limit order would be the best choice:
If you don't have time to constantly monitor the market. In this case, assess the market situation at any convenient time and set limit orders that will work without your participation when the conditions are met.
If you prefer news trading. Trading stocks after a news release can bring profit, but it often happens when you simply do not have time to place an order according to the market or the price changes significantly. To avoid this, set limit orders above and below the current price, so when news is published, they will trigger the trade automatically.
If you want to buy or sell at a specific price. If you trade at price levels, limit orders are the best choice. They allow you to open trades at a specific price and help avoid emotional trading.
- If you want to automate your trading. Setting limit orders allows traders to make trading completely automatic. This will help you save time and not worry about the result.
Disadvantages of Limit Order
Like any other orders, limit orders have disadvantages. Do not use limit orders if:
You want to be sure to enter a trade. A limit order is the right to buy or sell an asset but not the trade itself. If the price does not reach the order level even by 1 point, it will not trigger, and your trade will not be activated.
You want to open a trade right now. A limit order is triggered when certain conditions are met, and if you need to buy stocks or currency right now, it is better to use a market order.
You want to follow the profit. If your trade is profitable and you want to make the most of it, adjust it manually, as a limit order is often triggered after price corrections, preventing you from making the maximum profit.
Limit Order Examples
Let's look at the use of a limit order using the example of BRENT oil trading.
The asset is moving in a sideways channel, which has boundaries between the levels of $87 and $71 per barrel. We will trade using limit orders at these levels.
Sell position
The position is formed using a Sell Limit order, which is set at the level of the expected price reversal. The price has already been reversed many times at level 87. It is logical to set the Sell Limit there. When the order execution price reaches 87, the order will be triggered, and a sell trade will be opened.
Buy position
This position is formed using a Buy Limit order, which is set at the level of the expected price reversal. The price has already reversed up many times at around 71. It is logical to set the Buy Limit at this level. When the price falls to 71, the order will be triggered, and a buy trade will be opened.
Thus, you can open many trades while the price is moving in the channel. You can also set such limit orders as Take Profit, which specifies the price at which to close an open position for a profit. If the Sell Limit is triggered, a sale will occur at a price of 87. Then, when the price falls to around 71, Take Profit will trigger, fixing a profit of $16. At the moment Take Profit is triggered, the Buy Limit order is activated, opening a purchase, the Take Profit for which is set at level 87. Thus, trading is almost completely autonomous.
Conclusion
So, the key points of using limit orders in trading are reliability and autonomy. There is no need to spend long hours looking at the price and waiting for it to reach decision levels. Limit orders are quick and easy to set up and just as easy to configure. They always guarantee the best price, and, unlike market orders, are processed by brokers first. Limit orders also allow you to trade in both directions at once, which is very useful during news trading.
Limit Orders FAQ
A limit order is a market order to buy or sell at a predetermined price. It can be either temporary or with a pending execution.
A buy or sell trade after the market price reaches the order level is an example of a limit order. When the quote reaches the limit price, the order is triggered as a regular trade.
Limit orders are an integral part of trading, and trading without them is simply impossible for most technical analysis trading strategies. Also, limit orders simplify the trading process and can make it completely automatic.
A limit order is executed when the maximum Bid or Ask price reaches the limit price of the order. In the case of Buy Limit, this is the Ask price, and in the case of Sell Limit, this is the Bid price.
Limit orders are configured by traders and have several operating modes. Permanent or "good til canceled" orders are common for Forex. In the stock market, you can set orders with a time limit, after which the order is simply deleted.
Limit orders are transactions that are secured by traders’ money once triggered. However, until the order is triggered and the quote has not reached the limit price, the transaction is not executed, and, therefore, no money will be spent.
Limit orders have no obvious disadvantages. However, the lack of a guarantee that a transaction will be completed is a disadvantage of using limit orders. If the market price has not reached the limit price level, the order will not be executed and the transaction will not be opened.
A limit order can only be executed if the market price reaches the order level. If the market quote does not reach it, the order will not be executed.
Limit orders are much safer than market orders, since they guarantee an accurate trigger price. Market orders are often opened with slippage, which can reduce profits during strong fluctuations.
Because a buy or sell order involves a limit price at which traders are willing to buy or sell a stock or other assets. It assumes that the transaction price cannot be higher or lower than the limit specified in the application.
If a limit order is not active, it is displayed in the trading terminal in a separate tab below the balance line and the value in the profit/loss column is always 0. If a limit order is executed, it looks like a regular sell or buy transaction.
If the limit order is not executed, the trade will not be opened. So, nothing dangerous will happen to the trader. This will not affect the trading account in any way, and the order will remain inactive.
A limit order can be canceled at any time before it is triggered. When it is triggered, the order will turn into a regular transaction, which will be managed in the standard way.
A limit order is executed only when the market price reaches the order level. A market order is executed immediately at the nearest price in the market.
Limit orders are used during trend reversal, while stop-limit orders are needed to open trades during a continuing trend. If the price rises, then the limit order will sell stocks when the limit price is reached, and the stop limit order will buy.
A limit order may not be executed for two reasons. Firstly, the market price has not reached the limit price for opening the order. Secondly, there was a price gap in the market within which the order was located. Then, the order will not trigger since there was no required price in the market.
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
Rate this article:
{{value}}
( {{count}} {{title}} )
