A limit order is an essential tool for traders eager to set prices depending on how much they plan to spend when trading stocks. It can be either a buy or sell limit order, which means the tool can be applied for both purchasing or selling the asset. This fact makes it a great instrument, as it can be used on both sides of the transaction.
On the one hand, a limit order may seem to slow down the trading process. Besides, there is a chance of missing out on a potentially profitable trade when the market is extremely volatile. On the other hand, it is one of the fundamental risk management options that traders must consider.
In this article, we will review the main benefits of using a stop limit order as well as how it works when buying or selling stocks.
Initially, a limit order serves the same purpose (to set prices at which one is eager to buy or sell the asset). The main benefit about the tool is that it can be applied on both sides of the trade, which makes it quite flexible. The term got its name for setting the price limit when purchasing or selling the underlying stock. In simpler words, you announce the price limit and the most favourable trading terms to the market:
Note: limit and market orders are not the same. They are opposite.
When using a market order, the trade will be executed as soon as possible without price consideration. Beginners who use traditional trading apps with default configurations are most likely to place preset market orders.
However, they make no sense in case of extreme market volatility, as the trade is executed as close to the price of the anticipated order as possible. It will not work with low traded volume when trends can make rapid swings. It may result in losing more than you expect when purchasing or generating less when selling.
Note: check your broker’s trading priority list to enable or disable the limit order.
To place a limit order, you will need to clarify some of the fundamental components. Your stockbroker will use them to execute a trade. They include the following:
With these 5 parameters in mind, a broker will apply a limit order taking into account your preferable market conditions. Of course, these factors can be changed regarding the situation on the market.
Placing a limit order requires some knowledge and practice. If you place a but limit too low, there is a high possibility for the trade to be never filled. The same works for the sell limit. At some point, you will gain enough experience with the ability to clearly identify the best spots to place a limit order ensuring it will get filled.
Limit orders may appear to be a great risk management tool. On the one hand, they can prevent traders from extreme losses. On the other hand, they can let you generate gains tat are higher than you could expect.
At the same time, such orders can lead to losses, especially when triggered too soon due to extreme market volatility. To ensure the most favourable outcome, experts recommend placing the limit order outside daily price fluctuation.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.