What is a Limit Order?
A limit order is an instruction to buy or sell a security at a specific price or better. Unlike market orders that execute immediately at current market prices, limit orders provide price control by only executing when the market reaches your specified price level.
This order type is essential for traders who want to control their entry and exit prices, avoid slippage, and implement disciplined trading strategies with predetermined price levels.
How Limit Orders Work
Buy Limit Orders
Execute at the limit price or lower, ensuring you don't pay more than intended.
Key Characteristics:
- • Sets maximum purchase price
- • Only executes at limit price or better (lower)
- • May not fill if market stays above limit
- • Provides downside price protection
- • Good for buying dips or pullbacks
Sell Limit Orders
Execute at the limit price or higher, ensuring you receive at least your target price.
Key Characteristics:
- • Sets minimum sale price
- • Only executes at limit price or better (higher)
- • May not fill if market stays below limit
- • Provides upside price protection
- • Good for taking profits at targets
Execution Priority
Limit orders are prioritized by price and time in the order book.
Order Book Priority Rules:
Buy Orders (Bids)
- • Higher price = Higher priority
- • Same price = First in, first out
- • Must be at or below current ask
Sell Orders (Asks)
- • Lower price = Higher priority
- • Same price = First in, first out
- • Must be at or above current bid
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Practical Examples
Buy Limit Order Example
Scenario:
- • Stock: Apple (AAPL)
- • Current Price: $150.00
- • Your Target: Buy at $148.00
- • Order: Buy 100 shares @ $148.00 limit
Possible Outcomes:
- • ✅ Price drops to $147.50 → Order fills at $147.50
- • ✅ Price drops to $148.00 → Order fills at $148.00
- • ❌ Price stays above $148.00 → Order doesn't fill
- • ⏳ Price briefly touches $148.00 → May partially fill
Result: You either buy at $148.00 or better, or you don't buy at all. No risk of paying more than your limit price.
Sell Limit Order Example
Scenario:
- • Stock: Tesla (TSLA)
- • Current Price: $200.00
- • Your Target: Sell at $205.00
- • Order: Sell 50 shares @ $205.00 limit
Possible Outcomes:
- • ✅ Price rises to $206.00 → Order fills at $206.00
- • ✅ Price rises to $205.00 → Order fills at $205.00
- • ❌ Price stays below $205.00 → Order doesn't fill
- • ⏳ Price briefly touches $205.00 → May partially fill
Result: You either sell at $205.00 or better, or you don't sell at all. Guaranteed minimum sale price protection.
Advantages vs. Disadvantages
Advantages
Price Control
Never pay more or sell for less than your limit
No Slippage
Avoid unfavorable price movements during execution
Better Entry/Exit
Wait for favorable prices without monitoring
Disciplined Trading
Stick to predetermined price levels
Disadvantages
No Execution Guarantee
Order may never fill if price doesn't reach limit
Missed Opportunities
May miss big moves if price gaps past limit
Partial Fills
Large orders may only partially execute
Time Sensitivity
Market may move away from limit price permanently
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Best Practices for Limit Orders
Strategic Placement
Support and Resistance
- • Place buy limits near support levels
- • Place sell limits near resistance levels
- • Use technical analysis for placement
- • Consider psychological price levels
Market Conditions
- • Widen limits in volatile markets
- • Tighten limits in stable conditions
- • Account for bid-ask spreads
- • Consider time of day effects
Order Management
Time in Force Options
- • Day Orders: Cancel at end of trading day
- • Good Till Canceled (GTC): Active until filled or canceled
- • Immediate or Cancel (IOC): Fill immediately or cancel
- • Fill or Kill (FOK): Fill entire order immediately or cancel
Order Size Considerations
- • Split large orders to improve fill rates
- • Consider average daily volume
- • Use iceberg orders for large positions
- • Monitor order book depth
When to Use Limit Orders
Ideal Situations
- • Trading illiquid or volatile stocks
- • Implementing swing trading strategies
- • Taking profits at predetermined levels
- • Buying dips or selling rallies
- • Large position entries/exits
- • When you can't monitor the market actively
Less Ideal Situations
- • Emergency exits or stop losses
- • Fast-moving momentum trades
- • News-driven breakout trades
- • When immediate execution is critical
- • Very liquid markets with tight spreads
- • During market gaps or halts
Key Takeaways
Price Control: Limit orders ensure you never pay more (buy) or receive less (sell) than your specified price.
No Guarantee: Orders may not execute if the market doesn't reach your limit price.
Strategic Tool: Best used with technical analysis and predetermined entry/exit strategies.
Discipline: Helps maintain trading discipline by sticking to planned price levels.
Master Trading Platforms
Learn how to use different order types effectively across trading platforms
Related Trading Concepts
Market Order
Execute immediately at the best available price - the opposite of limit orders.
Stop-Loss Order
Automatic sell orders triggered when price drops to limit losses.
Bid-Ask Spread
The difference between buying and selling prices in the market.
Order Book
Real-time display of buy and sell orders waiting for execution.
Slippage
The difference between expected and actual execution prices.
Liquidity
How easily an asset can be bought or sold without affecting price.
Trading Risk Disclaimer
All trading involves risk of loss. Limit orders do not guarantee execution and may result in missed trading opportunities. Past performance does not guarantee future results. Always understand order types and their implications before trading. Consider consulting with qualified financial professionals and practice with paper trading before risking real capital.