Limit order definition
What is a limit order?
A limit order is an instruction to execute a trade at a level that is more favourable than the current market price. There are two types of limit orders: entry orders (that open a new position) and closing orders (that terminate an existing position).
Limit orders allow you to specify the minimum price at which you will sell, or the maximum at which you will buy, an asset. If you want to open an order to buy or sell an asset at a price that is less favourable than the current market price, you would use a stop order.
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Limit order example
If you want to buy Apple stock at $200, but the current market price is $205, you could set a limit order to buy the shares when the price drops to $200. There is no guarantee that the stock will reach your set price, but if it does your limit entry order would be triggered and your position opened.
You might then decide to sell when the Apple share price reaches $210. In this case you would place a limit close order and sell when the stock reaches your target price, which would enable you to realise your profit.
Pros and cons of a limit order
Pros of a limit order
Some traders like limit orders because they can decide on the maximum price at which they want to open or close their position. If the market reaches that level, the trade will be carried out. So, limit orders enable traders to execute a trade at a certain level without having to constantly monitor the price of the asset.
With limit open orders, there is even the potential for positive slippage. If the market suddenly dips below your set amount, your position could open at an even better price.
Cons of a limit order
However, a limit order is not guaranteed to be filled, because the market price may never reach the amount that you have specified. This means that if there was a particular position that you needed to open or close, you would be at risk of it never being executed, which could impact your trading plan.
Using a limit order could also be disadvantageous if the market you are trading is very volatile. If you were using a limit entry order, and the market dropped significantly, your position would open but it would be at a loss straight away. And if you were using a limit close order, there is the risk that a sudden movement of price might prevent your order being triggered at the level at which it was set, which could impact your final profit.
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