There’s multiple ways investors and speculators can place their orders on the market. Generally order types fall into two categories: market orders and limit orders. Market orders enable traders to buy and sell certain assets at current prices and in current time. Whereas, limit orders allow selling from a specific, predetermined price.
Limit order definition
A limit order is an order type that gives the broker the authority from a trader to buy or sell a security at a predefined price. The obvious downside is that the price may never reach the desired level and the order will never get filled.
Why is understanding a limit order important for traders
- Traders awaiting a specific price target can avoid staring at their screens and place a limit order for the instrument of their preference
- Limit orders help traders plan their trades and trade their plans better
- Limit orders are executed by trading platforms and human error is not present. No hesitations and delays. Limit orders are incredibly precise.
- Understanding the limit and market orders can help traders understand how prices are created on the markets.
Limit order explained in detail
Limit orders give traders the opportunity to buy and sell securities at specified prices. If the EUR/USD pair is traded at 1.02 and a buy limit order is placed at 1.01, the order will not be filled unless the price drops to the 1.01 level.
Limit orders are especially useful for position traders that are aiming their entries and exits with a great attention to detail. Limit orders remove the need to constantly monitor the markets using your computer screens. In addition to entries and exits, you can set stop loss and take profit targets in advance that will only be activated in case the limit order gets triggered.
There are 4 types of limit orders in Forex when it comes to position opening:
- Buy limit order gets filled if a price drops at a certain limit price and the position opened is long.
- Sell limit order gets filled if a price reaches the predetermined higher price and the position is short.
- Buy stop order gets triggered when the price breaks higher than the current market prices. At this point you might be wondering why would anyone buy a currency pair after the price increases and why wouldn’t they do it now, while it’s still low. The answer is simple, buy stops are used in trading strong trendline breakouts, when traders are anticipating the price will continue rising.
- Similarly to the buy stop, sell stop enables traders to trade breakout, only to the opposite, short direction.
Limit order FAQs
When should I use a limit order?
Limit orders can be useful in various situations. Limit orders can help traders to buy and sell assets at predetermined prices. They can help you trade from the best price levels and give you the best risk to reward ratios. They can also help trade breakouts from significant levels. However, keep in mind that if the price doesn’t reach the limit level, the order stays unfilled.
Are limit orders better than market orders?
Both limit and market orders are only tools for placing orders. Market orders are usually useful for trading in the trend direction, scalping and speculating on market news. Limit orders are useful for position traders. Depending on the situation, both types of orders enrich the traders’ abilities to make profits.