What is a limit order?
Limit orders are trade orders used by traders in financial markets to buy or sell, amongst others, securities, commodities, and currencies at a specified price or better.
Examples of financial markets in which limit orders are used are stock markets (stock exchanges), bond markets, derivatives markets, commodities markets, and the foreign exchange (forex) market, also called the currency market.
Limit orders are utilised in the trading of securities, such as shares (stock) of publicly traded companies and derivatives (options and futures), commodities like gold and silver, debt instruments such as bonds, and currencies of countries.
What is trading?
Investopedia explains that ‘trading implies active participation in financial markets as opposed to investing, which suggests a buy-and-hold strategy. Trading success depends on a trader’s ability to be profitable over time’ (Accentuation by the article writer.)
This implies that, contrary to investors who are more interested in profits in the long term, traders execute active trading to generate profits from short-term price fluctuations. Examples of traders who practise active trading are day traders, swing traders, and scalpers.
Other types of trading orders
Besides limit orders, there are other types of orders that can be placed by traders to execute trades, namely market orders, stop orders, stop-limit orders, and trailing stop orders.
Market orders
A market order refers to an order to buy or sell a security or currency immediately at the current market price. A key feature of a market order is that the buying- or selling price is set by the market and cannot be controlled by the trader.
This type of order guarantees the execution of the order, but not the execution price.
Usually, a market order will be filled at or near the current bid price (regarding a sell order) or ask price (for a buy order).
Keep in mind that the last traded price of a security, commodity, or currency is not necessarily the price at which a market order will be filled.
Stop orders
A stop order is a type of order that activates a market order once a predefined price (the stop price) is reached. It can be used to start a new trade or to close an existing one.
Two types of stop orders commonly used in trading are sell stop orders and buy stop orders:
- A sell stop order is an instruction to sell a security or currency pair once the stop price or a lower price is reached.
- A buy stop order is an instruction to purchase a security or currency pair when the market price reaches the predefined price or higher.
Stop orders are filled at the best available price, depending on the availability of liquidity in the particular financial market.
Stop orders, also referred to as stop-loss orders, are used to:
- Enter a financial market when a breakout occurs, i.e., when the price of a currency pair, security, or commodity moves above a resistance area or drops below a support area.
- Protect profits.
- Limit downside risk, reducing losses.
Stop-limit orders
A stop-limit order, also known as a stop-limit, is a combination of a stop order and a limit order. It is a type of trade order that requires a trader to set two prices – the stop price and the limit price.
As soon as the price of a financial instrument, commodity, or currency pair reaches the stop price (predetermined price), the order becomes a limit order, which will only be executed at the specified limit price or better.
Contrary to stop orders, stop-limit orders guarantee a price limit.
Trailing stop orders
A trailing stop order serves the same purpose as a typical stop order, with the exception that the stop price is set at a certain percentage away from a security’s or currency pair’s current market price.
For example, a trader buys shares at a price of R50 per share. He or she sets a trailing stop order of 15%, meaning if the share price dips 15% or more, the order will be filled.
For a long position – when the trader expects that a financial instrument will increase in value – a trailing stop is set below the current market price. For a short position – when the trader anticipates a decrease in the value of a financial instrument – the trailing stop is placed above the current market price.
Limit orders explained
A limit order is a type of order in financial markets that enables traders to set a specified price (referred to as the limit price) at which they are willing to buy or sell a currency pair or security such as a stock or a derivative, just to name a few.
A limit order also referred to as a take-profit order, is an instruction to execute a trade at a price that is more rewarding than the current market price.
Typically, a trader will use this type of entry order when he/she assumes the price of a financial instrument or currency pair will reverse when it reaches the specified price.
Express differently, a limit order is placed when a trader is willing to enter a new position or to exit a current position at a specified price or better.
In trading terms, a position indicates the market commitment or exposure held by a trader. It can be either an open position, which allows a trader to generate a profit or to incur a loss, or a closed position, which refers to a trade that has recently been cancelled. A profit or loss on a position can only become a reality once the position has been closed.
A limit order will only be executed if the security or currency pair trades at a specific price or better. Hence, a limit order does not guarantee the execution of a trade.
In trading, a limit order is an order that can be placed to either buy below the market price or sell above the market price at a specific price – the limit price.
Limit orders can only be executed when the price becomes more favourable to the trader.
Traders can set a limit order with a good-till-cancelled (GTC) instruction, with an expiry date, or indefinitely.
A buy limit order
A buy limit order, also called a buy limit, a limit-buy order, or a limit order to buy, allows a trader to specify the maximum price at which he/she will buy a security or other type of financial instrument.
It is an order that is placed that enables a trader to buy at or below the limit (specified) price.
A limit order to buy at a specific price below the current market price will be filled (executed) at a price that equals the limit price or at a lower price.
Buy limit orders are typically used by traders to enter a financial market in order to trade against a prevailing trend in the market. This strategy is referred to as fading.
To fade a breakout, a limit buy order is placed to go long (the trader expects that the price is going to rise) near a support level. For example, if a trader is of the opinion that the current decline of a particular currency pair will pause and reverse near a certain support level, he/she may want to seize the opportunity to go long when the currency pair falls to a level near the support level.
At this point, the trader can place a buy limit order a few pips above the specific support level so that his/her long order will be executed when the price declines to the specified price or lower.
A trader can also use a buy limit order to set his/her profit goal, allowing him or her to exit the market once the pre-set profit goal has been reached.
Example of a buy limit order:
A trader is interested in the stock of the company Good & Plenty but does not find the current market price of R75 acceptable.
However, the trader is very keen to buy a number of shares of the company and instructs his broker to buy 1 000 Good & Plenty shares with a limit order, specifying a limit price of R65 per share.
The broker places a limit order, good-till-cancelled (CTC), to buy 1 000 shares of the company Good & Plenty with a buy limit of R65 per share.
In anticipation of a significant announcement by the board of directors, the company’s share price fluctuates between R65.50 and R75 for a few days. Although the share price drops considerably from R75 to R65.50, the broker is not allowed to buy the shares because R65.50 per share is still higher than the specified price of R65 per share.
After the announcement has been made, the market reacts negatively, causing the share price to drop to R63.70. The broker can now start to buy the shares on behalf of the trader, depending on the availability of the shares.
The order will stay open until all 1 000 shares are purchased at a price below the limit price. If it is not possible to buy all of the 1 000 shares before the share price rises above the limit (specified) price, the order is closed.
If the buy limit is a GTC order and is not fully filled, the trader is allowed to cancel the order.
A sell limit order
A sell limit order, also called a sell limit, a limit order to sell, or a limit-sell order, is an instruction to sell, inter alia, a currency pair, shares, or derivatives, at a specified price or higher, which must be higher than the current market price.
A limit order to sell will only be filled at a price equal to or higher than the limit (specified) price.
As with buy limit orders, sell limit orders are also used by traders to fade breakouts.
For example, a trader uses a sell limit order to fade a breakout when he/she thinks that it is unlikely that the upward movement of a particular currency pair will break through a resistance level. Based on this assumption, the trader decides to go short (expecting that the price will decrease) when the currency pair increases to near the specific resistance level.
In order to take advantage of such a situation, the trader can place a limit order to sell a few pips below the resistance level so that his or her short order will be executed when the price of the currency pair increases to the limit (specified) price or higher.
Similar to buy limit orders, sell limit orders enable traders to exit a market once their pre-set profit targets have been reached.
Example of a sell limit order:
The currency pair GBP/USD is trading at 1.3730 on 14 January 2025. A trader decides to go short if the price reaches 1.3750 and sets a sell limit order at 1.3750.
If the price rises to 1.3750, the sell order will be filled at the limit price or at a higher price.
Advantages of limit orders
- Limit orders allow traders to enter and exit trades with a specified price, enabling traders to accomplish a predetermined goal.
- A limit order helps a trader when he/she cannot continuously or regularly keep track of his/her trades but has a certain price in mind at which he or she would like to buy or sell a security or currency pair.
- They can be beneficial in volatile markets when prices suddenly rise or fall, causing concern among traders about unfavourable prices from market orders.
Disadvantages of limit orders
- Limit orders are not guaranteed to be filled because the market price may never reach the limit price a trader has specified.
- They can result in missed opportunities because if the price of an asset does not reach the limit price no trades are taking place.
Frequently Asked Questions
Can I cancel a limit order?
Limit and stop orders can stand for hours or even days before being filled and as long as a limit order or stop order has not been filled yet, it can be cancelled without any difficulty.
Are limit orders good?
Limit orders can help you to save money on commission. This is especially the case on illiquid stocks that tend to bounce around the bid and ask prices.
Why do some limit orders get rejected?
If your limit order is too aggressive or fails one of the risk checks by the broker it stands a chance of being rejected.
How long does a limit order take?
Once your order is filled it can take several days to go through the clearing and settlement process; however, it is possible that you will see it in your account instantly.
Is it possible to place multiple limit orders?
No, you are not allowed to put a sell limit and a stop loss order on the same stocks or shares at the same time.
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