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 stocks, 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 stock trading limit order

1. Open a stock trading account to get started
2. Conduct technical analysis and fundamental analysis on the stocks you want to invest in
3. Choose ‘Limit order’ under ‘Order type’. Remember, you can’t place limits (take-profits) on our stock trading 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’ve conducted your own analysis and believe that the Alphabet share price, which is currently at 142.50, will go up briefly but then start falling. So, you decide to go short on the shares and place a limit-entry order at 145.00.

You set up the order to automatically sell 10 share contracts for difference (CFDs) of GOOGL when the price hits 145.00. The margin requirement is equal to the number of shares x the price x the margin factor of 20%. That is, (10 x 145.00) x 20% = $290.

As you’ve predicted, the share price reaches 145.00 and your position is opened. To protect any profits you might make, you set a limit at 125.50. If Alphabet shares hit this level, you’ll be closed out, making a profit of $195 (calculated as 10 x [145.00 – 125.50]).

You also want to mitigate possible losses on this position, so you set a stop-loss at 155.50. If the share price does rise to this level, your position will automatically be closed out and you’ll make a loss of $105 (calculated as 10 x [145.00 – 155.50]).

Benefits and risks of a limit order

Benefits of using limit orders

• You won’t need to constantly monitor the market, waiting and checking to manually open a trade at your preferred opening price
• In the case of very volatile markets, this could even lead to a phenomenon called ‘positive slippage’ – where the market suddenly moves beyond your set amount, fulfilling your order at an even better price

Risks of using limit orders

• There’s the chance that a position may never be opened, which could affect your trading strategy, because a limit order is ‘your price or better’
• Limit orders don’t necessarily protect against losses – for that, you’ll need a stop-loss. However, a stop order (ie stop-entry order) could act as a stop loss if you set a working order to ‘net off’. In fact, that’s how you’d do it on a stock trading account with us. While this is also possible on contract for difference (CFD) trading with us, it’s generally not an efficient way to go about it