Definition and Use of Limit Orders
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Definition and Use of Limit Orders

7 Min.

When placing a limit order, you are the one determining the limit price, which is a specific price set by you. Only when the market price reaches your limit price or better, the trade will execute. The use of limit orders enables buying at a lower price or selling at a higher price compared to the current market price.

Contrary to market orders, limit orders are not executed immediately as they are placed on the order book. Furthermore, as a maker instead of a taker, limit orders typically result in lower fees in most cases.

Basics

If you're experiencing difficulty deciding on which order type to use for purchasing bitcoin or ether, it's essential to understand the differences between them before placing an order. Different order types have varying effects on trades. To have more control over trades, limit orders can be used to put a cap on the buying or selling price of a coin.

What Is a Limit Order?

When placing a limit order, you set a specific buy or sell price by establishing a minimum or maximum price you're willing to trade an asset. Your order will be placed on the order book and only executed if the market price reaches the limit price (or better).

As opposed to market orders, where trades execute instantly at the current price, a limit order provides greater control over the execution price. Since limit orders are automated, there's no need to monitor the market constantly or worry about missing a buy or sell opportunity while sleeping.

Nevertheless, there's no assurance that your limit order will be executed. If the market price fails to reach the limit price, your trade will remain unfulfilled on the order book. Typically, a limit order can be set for several months, but it depends on the cryptocurrency exchange utilized.

Limit Order Execution

Placing a limit order involves setting a specific buy or sell price for an asset, and it will only be executed if the market price reaches the limit price (or better). For example, if you want to sell 1 BTC at $36,000 while the current price is $33,000, you can place a BTC sell limit order of $36,000. Your order will be executed once the BTC price reaches the target price or higher, depending on the market liquidity. However, if there are other BTC sell orders ahead of yours, those orders will be executed first, and your order will be filled with the remaining liquidity.

It’s essential to consider the expiration date of your limit order as well, which can typically last up to 90 days. Market volatility can cause prices to fluctuate, making it crucial to keep an eye on your orders to ensure they are still desirable. For instance, if you set a sell limit order of 1 BTC at $36,000, and the price of BTC surged to $38,000 after a week, your order would be executed at $36,000, and your profits would be limited to the target price you set a week ago. Therefore, it's recommended to review your open limit orders regularly to keep up with the constantly changing market conditions.

Stop-Loss vs. Limit Orders

Various types of orders are available for cryptocurrency trading, including limit, stop-loss, and stop-limit orders. A stop-loss order is a market order that will activate once the market reaches your stop price. It's a buy or sell order at the market price after the coin price hits the stop price you set. If the stop price isn't reached, the order won't execute. Sell-stop orders can be used to minimize losses in case the market goes against you. They can also be used as a “take-profit” order to exit a position and secure unrealized profits. Similarly, buy-stop orders can be used to enter the market at a lower price.

When it comes to execution, the difference between a limit order and a stop-loss order is that the former will execute at the limit price you set (or better), while the latter will execute as a market order at the current market price. However, if the market price changes too rapidly, your order may be filled at a price that varies greatly from the trigger price.

Stop-Limit vs. Limit Orders

Stop-limit orders offer a combination of stop and limit orders. When the stop price is reached, it triggers a limit order that is executed at the limit price or better. This order is suitable for people who do not have the time to monitor their portfolios closely and want to limit their potential losses on a trade.

When setting a stop-limit order, you need to define two prices: the stop price and the limit price. Stop-limit orders differ from limit orders in that they will only place a limit order if the stop price is reached. Conversely, limit orders are placed instantly on the order book.

Let's say BTC is trading at $36,000, but you want to sell if the price drops below $35,000 to limit your potential losses. You would place a sell stop-limit order with a stop price of $35,000 and a limit price of $34,900. If the BTC price drops to $35,000, the system will automatically set up a sell limit order at $34,900 or higher. If the market moves too fast and the BTC price drops below $34,900 before your order is filled, there is a chance your order will remain unfilled.

Stop-Limit vs. Stop-Loss Orders

After you set the stop price, both stop-limit and stop-loss orders will be triggered. But there's a difference between them: once a stop-limit order is triggered, it creates a limit order. Meanwhile, once a stop-loss order is triggered, it creates a market order.

Using Limit Orders

In trading, a limit order can be used in several scenarios. If you wish to purchase or sell at a specific price lower or higher than the current market price, a limit order may be appropriate. It is also useful when there is no urgency to trade immediately, to protect unrealized profits, and to minimize losses. Additionally, dividing orders into smaller limits can achieve a dollar-cost-averaging effect. It's important to note that even if the limit price is reached, the order may not always be executed, as it depends on market conditions and liquidity. Sometimes, a limit order may only be partially filled.

Conclusion

Limit orders provide traders with a highly effective method for controlling their trades. By specifying a particular buy or sell price, traders can execute their trades at the exact price they want. Unlike market orders, limit orders require the market to reach the specified limit price before executing the trade. This feature enables traders to buy at a lower price or sell at a higher price than the current market price, which can be advantageous in certain trading situations. Furthermore, as a maker instead of a taker, limit orders typically result in lower fees in most cases.

Overall, although there is no guarantee that a limit order will execute, this type of order is an essential tool for traders who want to have more control over their trades. By setting specific buy or sell prices, traders can protect unrealized profits, minimize losses, and achieve a dollar-cost-averaging effect by dividing orders into smaller limits. It is important to note that traders need to regularly review their open limit orders to keep up with the constantly changing market conditions. Ultimately, traders who master the use of limit orders will have a significant advantage in the cryptocurrency market.

Stop-Loss Order
Limit Order
Stop-Limit Order
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