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.
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.
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.
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:
Sounds too good to be true? Well, the strategy has some slight drawbacks traders need to take into account.
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:
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.