What is a limit order and why should a trader use it? A limit order is different from a traditional market order. Mainly refers to traders who prefer calm and steady tactics instead of being in a rush all the time. The key difference here is that a limit order requires some time to be executed instead of instant processing. The idea is to watch until your ask or bid price eventually reaches the required level.
Among the crucial advantages of the limit order is the ability to benefit from better purchasing and selling prices. What's more, such orders are generally placed on major support and resistance levels. Besides, traders will have a chance to have their bigger limit orders split into smaller ones to get the cost average effective.
So, what is a limit order? How can it help traders who avoid the financial rush? How does buy limit order work? Stay tuned to find the answers in this article.
What Is a Limit Order?
When a trader places a limit order, it means that he or she is eager to book a fixed price limit. The main advantage here is that you are the one to determine that price limit. This is the concept that lies behind the limit price meaning. So, once the limit order has been placed, the action (purchase or sell order) will be executed only when the price reaches the specified limit.
The same will take place if it approaches a better level with more potential benefit for the trader. The strategy works great in case you look for the slightest opportunity to purchase an asset at its lowest price or sell when the price reaches its high. The strategy can be configured according to your trading tactics and strategies. You may set a percentage from your current balance inside the trading platform.
Buy Limit Order Pros and Cons
Let's say, we want to purchase an asset at its lowest price. A limit order will let you control your fund as well as how much you are going to spend. In other words, the strategy guarantees that you will buy a needed instrument at a price you have chosen for the limit (or even lower). It seems like a flawless strategy that prevents huge losses. Well, it certainly has some obvious hits and misses.
Buy Limit Order Benefits
If you place a buy limit order, you prevent the asset price going upper the limit. You actually get a tool that makes it possible to establish a safe market entry position. The core strategy advantage includes:
- Precise Entering Position – traders can determine exactly the point to enter the market with the buy order.
- Price Improvement – with a limit order, there is always a chance to purchase an asset at even a better price, especially if you see the stock gapping each day. As a result, a limit order prevents you from being dependent on the daily price gaps.
- Good for Day Traders – some may think that limit orders will not work for day traders who try to capture quick and small profits with instant execution. Well, that's not true. A limit order is actually a bid with a chance for traders to avoid spreads.
- Effective in Volatile Markets – apart from the market order, a limit order will assure that you do not pay more even if the stock price has been moving rapidly from day to day.
Sounds too good to be true? Well, the strategy has some slight drawbacks traders need to take into account.
Buy Limit Order Downsides
You need to clearly understand that a limit order does not always guarantee the execution. This is actually the major downside. The purchase will complete only if:
- The price of the asset is close to the limit price.
- A sell order transacts with the purchase limit order.
Besides, you need to have at least 100 shares booked to buy at the required price considering thousands of other shares waiting for their chance to be purchased, So, we actually have a virtual queue and you need to be among the first in line to have the order executed within the buy limit price.
Another disadvantage includes missed opportunities resulting from total cost control and the amount you are to pay for the asset. The financial market is moving. Profitable opportunities may arise on the spur of the moment and you should be always ready to seize them.
If you see an asset price rising rapidly, it may never pull back to the price limit you are expecting. The only solution here is to buy at a most reasonable price before it goes too high. In this case, market orders will be a better alternative.
Whatever you choose, make sure you are well aware of how limit orders work. Also keep in mind that 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.