What is a limit order and how do you place one?

What is a limit order?

A limit order, sometimes called a limit-entry order, is an instruction to your trading broker to open a trade when the market level reaches a better, preselected price. If you’re buying, ‘better’ means a lower price but if you’re selling, it means a higher price. You can place a good-till-cancelled or good-till-date order – but selecting a price that’s better than the current price will always be a limit order. If the price you set is worse, it’s a stop order.

What’s the difference between a limit order and a limit?

While a limit order is a type of working order, a limit (also called a take-profit) is a risk management tool that you can attach to your trades to safeguard potential profits once the position is open.

For example, for a short position on Barclays shares, you can set a limit at a lower price that’ll automatically close out your position if the share price hits this level or gaps beyond it. You can place a take-profit on a leveraged limit order, but the position won’t be open until the price level you set is reached – so, the limit (take-profit) won’t affect the trade until it’s filled.

How to place a limit order

1. Open a trading account to get started, or practise on a free demo account
2. Conduct technical and fundamental analysis on the market you want to trade
3. Select the 'Order' tab on the deal ticket of the market you're trading on
4. Decide whether you’re going long or short
5. Choose between a ‘good till cancelled’ limit entry, which will run until the predetermined price level is met (unless you cancel it), and a ‘good till date’ order, which will close out automatically on a predetermined future day if the order isn’t executed
6. Pick your price level – the ‘better’ amount at which you want your limit entry to be triggered – and place your order (based on the opening price that you choose, our platform will show you whether it’s a stop or limit order on the ‘Place order’ button)
7. Your position will open automatically when the market hits your price level

How to place a share dealing limit order

1. Open a share dealing account to get started
2. Conduct technical analysis and fundamental analysis on the shares you want to invest in
3. Choose ‘Limit order’ under ‘Order type’. Remember, you can’t place limits (take-profits) on our share dealing platform
4. Pick your chosen price level. This is the level at which you want your limit entry order to be triggered – we’ll open your position at the closest available price
5. Place your limit entry order

Example of a limit order

Let’s say you want to go short on Alphabet (GOOGL) shares and place a limit-entry order. You’ve conducted your own analysis and believed that Alphabet shares will likely fall soon. Your prediction is that this will happen when the GOOGL share price, which is currently at 157.50, hits 159.00.

So, you decide to open a spread bet at £5.00 per point and set up a limit-entry order to automatically sell (go short on) 10 Alphabet shares when the price hits 159.00. If the margin requirement is 20%, you’ll have to put down £159.00 to open your position (20% x [159.00 x £5.00]).

If the GOOGL price drops from this point, you’ll automatically have an open position as your limit-entry order will be executed. You also placed a limit (take-profit) at 139.00 so that your position will close out profitable if the market reaches this level. If your limit were to kick in, you’d make a profit of £100.00 ([159.00 – 139.00] x £5). However, if the share price rallies to 169.00, you’d make a loss of £50.00 ([159.00 – 169.00] x £5.00).