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Orders, stops and limits

What is a limit order?

A limit is an instruction to trade if the price of a market reaches a particular level that is more favourable than the current price. The limit order level is the maximum at which you are willing to buy, or the minimum at which you will sell for.

Limit entry orders

This is an order to open a position by buying when the market hits a lower level than the current price, or selling short when the market hits a higher level than the current price. This is suitable if you think the market price will change direction when it hits a certain level.

For example, if you use charts as a tool to help your trading, your analysis might suggest buying a share, index or commodity if the price drops to a level that’s been identified as significant.

Take a look at the example below for details on how limit entry orders work.

Example: GBP/USD limit to open

GBP/USD is currently trading at 1.6050. Chart analysis shows 1.6070 is a key resistance level; if the market reaches this level it's likely to then decline. You decide to sell GBP/USD if it reaches 1.6070, so you place a limit order to open at this level.

Two hours later, the market does indeed hit 1.6070. Your broker automatically carries out your sell order and opens your trade. If GBP/USD falls as you expected, you'll make a profit. If it continues to rise, however, you'll suffer a loss.

Limit closing orders

This is an order to close a long position when the market hits a higher level than the current price, or close a short position when the market hits a lower level.

For example, let’s say you have a long position that’s currently in profit. If you have a target level at which you’d be happy to collect your gains, you can set a limit to close out your position when and if this level is met. You may then avoid the risk of a subsequent change in market direction wiping out your profit.

Take a look at the example below for details on how limit closing orders work.

Example: Barclays limit to close

You own shares in Barclays, currently trading at 300p. Later, you see the price has risen to 310p. You’re not tempted to sell yet, as you think the market will keep rising. However, you don’t want to lose your profit if the market rises and then falls again.

You think there might be a line of resistance above 320p, which could reverse the upward trend. In case you're right and there is resistance, you set a limit to close your trade if the price of Barclays reaches 320p. Later, the market rises to 325p. As it passes 320p, your limit order is triggered. Your broker closes your trade, at or just above 320p.