Limit Order

Understanding Limit Order

When getting active in online trading, the term 'Limit Order' comes up quite frequently. A Limit Order is a specific type of order used by traders to buy or sell a specific amount of an asset at a set price (the limit price) or better. If the conditions aren't met, it won't execute. In other words, a Limit Order allows traders to lock in the price they want.

Type of Limit Orders

There are two kinds of Limit Orders:Buy Limit Orders and Sell Limit Orders.

'Buy' Limit Order

A 'Buy' Limit Order is to buy at a price equal to or less than the set limit. For instance, if a trader sets a Limit Order to buy a stock at $10, they get the stock only if the price drops to that level or lower. This strategy enables traders to buy an asset at a lower price.

'Sell' Limit Order

A 'Sell' Limit Order is to sell an asset when its price is equal to or more than the set limit. If the trader sets a sell Limit Order at $20, the order will only execute when the market price rises to that level or higher. This strategy enables traders to sell an asset at a higher price.

Advantages of Limit Order

The primary allure behind using a Limit Order is the predictability it provides in terms of price. With Limit Orders, traders can manage how much they're willing to pay or receive for an asset, eliminating potential losses due to market fluctuations. However, while the price is guaranteed, its execution isn't since the market may never reach the set limit price.

Limit Order and Market Volatility

Limit Orders offer a crucial defense mechanism against market volatility. When prices are fluctuating quickly, Limit Orders can ensure that traders don’t end up paying significantly more or receiving significantly less than they anticipated. It’s an essential tool for trading, especially during times of high market volatility.