Limit order: How to optimise your trades

Trading is often about finding the right time to make the most of your buying and selling. But what if you haven’t got the time to constantly monitor the market? Fortunately, there are ways to help you implement your trading strategy in a targeted manner. A limit order allows you to set a fixed price at which you want to buy or sell when trading. But what exactly is a limit order? This article provides you with information on the definition, examples, opportunities and risks of limit orders and tells you everything you need to know about this order type.

• A limit order allows you to set a fixed price for a sell order or buy order when trading with your broker 

• Sell or buy orders are only executed if the price reaches or falls below the limit price you have set

• Compared to other order types such as market orders, limit orders offer more control and help you to achieve the best possible price when buying or selling an underlying asset 

• Even though limit orders offer more control, there is a risk that your buy order will not be executed if the market does not reach the desired price 

Definition of limit order: What is that?

A limit order is a trading order or instruction. The trader specifies a certain price (an underlying value, or specificied limit) at which a security is to be bought or sold. 

The major advantage of a limit order is that execution only takes place if the rate reaches or falls below (in the case of a buy order) or exceeds (in the case of a sell order) the specified limit price. This allows traders to precisely control the price at which they buy or sell. Such order limits can be useful for minimising losses or taking profits without having to constantly monitor the market or rate movements. 

Other order types that can be used alongside the limit order to optimise returns are:

• Stop order: A stop order is triggered when the rate of an underlying asset reaches a certain level, which is then automatically executed as a market order. The subtypes of a stop order include the stop buy order, the stop loss order, the stop-limit order and the trailing stop order. 

• Market order: A market order is executed immediately at the current market price. It is used when a trade is to be concluded quickly, regardless of the price development. This is particularly useful in markets with high liquidity, where the difference between the buy and sell price is small.

How limit orders work

Limit orders work by setting a specific price that you are willing to accept for the purchase or sale of a security such as a stock. These orders are only executed when the specified price is reached, giving you more control over your trades.

There are two main types of limit orders: the buy limit order (buy limit order) and the sell limit order(sell limit order).

• With a buy limit order you set a maximum price that you are prepared to pay. The buy order is only executed if the price of the underlying asset falls to the specified limit price or below. This way, you avoid paying more than you are prepared to.

• With a sell limit order you set a minimum price at which you want to sell. This sell order is only executed if the market price reaches or exceeds the specified value. This ensures that you don't sell at a lower price than you planned.

For both a buy order and a sell order, a limit order offers the opportunity to minimise risk, increase the chances of favourable execution and benefit from potential positive rate developments. 

What does underlying asset mean for limit orders?

The underlying asset for limit orders refers to the underlying financial instrument that you wish to buy or sell. This can be a stock, a commodity, a cryptocurrency or another tradeable security. When you place a limit order, you specify the price at which you want to buy (buy order) or sell (sell order) the underlying asset. The value of the underlying asset determines whether and when your limit order is executed.

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What are the advantages of limit orders?

Limit orders give you a high degree of control over the price at which you buy or sell. Instead of accepting the current market price, you can use an order limit to specify the price at which your order should be executed. This allows you to determine precisely when an order is executed based on market activity. To summarise:

• With a buy order, you prevent yourself from going above the limit price you have set

• With a sell order, you protect yourself from selling at an unwanted low price

In volatile markets with strongly fluctuating rates and prices, limit orders offer additional flexibility. You can use them strategically to profit from short-term price fluctuations without continuously monitoring the market. This allows targeted opportunities to be exploited while at the same time minimising the risk of trading at unfavourable prices.

Risks of limit orders

Even though limit orders offer many advantages, there are some risks that you should be aware of. These risks are mainly related to the fact that a limit order is only executed if the limit price you set is reached. Here is an overview of some of the risks:

• No execution of the order: One of the biggest disadvantages of a limit order is that it may never be executed. If the market does not reach the price you have set, the order remains open and the trade does not take place. This can be particularly frustrating if you hope for a quick market reaction.

• Missed opportunities: If the price or market price moves quickly in the desired direction and only just misses your limit price, your order may not be executed. In this case, you may miss an opportunity to buy or sell at a good price.

• Price gaps: Especially in volatile markets, the price may change abruptly without reaching your limit price. These so-called "gaps" can lead to your order remaining untouched while the market moves on.

• Limited flexibility: As you set the price in advance, you may want to adjust your strategy, but the set limit price no longer allows you to do so. In a rapidly changing market, this could lead to you adjusting or holding your position at an unfavourable time.

Examples of limit orders

Limit orders can be excellent for different trading strategies and market conditions. A typical example is the use in volatile markets to take advantage of price setbacks (so-called dips). With a buy limit order, you can specify that you will only buy a stock or security if the price falls to a value you specify. This is particularly useful if you are speculating on short-term price fluctuations and want to avoid buying above the desired price level.

Example of a buy limit order:

Assuming the current market price of bitcoin is €62,000. You could set a buy limit order at €61,500 in order to enter at a favourable price in the event of a possible fall in the price. Alternatively, you could also place a buy order at €63,500 if you want to be in early if the price rises and speculate on a continuation of the rally.

Another common scenario is selling during a price rally. With a sell limit order, you can ensure that you only sell when the price reaches or exceeds a certain level. This can help you maximise your profits without having to constantly monitor the market. As soon as the price reaches your specified target value, your sell order is automatically executed.

Example of a sell limit order:

Let's assume again that Bitcoin is currently trading at a price of €62,000. You can place a sell order at €63,500 to take profits if the rate rises. At the same time, you could set a sell limit order at €61,500 to minimise losses if rates fall and the price falls below this level.
Limit orders are also frequently used in high-frequency trading strategies, in which numerous orders are placed in a short period of time. These orders make it possible to react precisely to small price fluctuations. Limit orders can also be useful in the Swing Trading Strategy, where traders speculate on medium-term price fluctuations. Here, traders can set their target prices in advance and automatically control potential profits or losses without having to constantly monitor the market.

How can I adjust or cancel limit orders?

One of the greatest strengths of limit orders is the flexibility they offer traders. You can change or cancel a limit order at any time as long as it has not yet been executed. This gives you more control and the chance to react to market changes.

• Adjusting a limit order: If the market develops differently than expected, you can simply adjust your limit order. This means you can change the limit price, adjust the number of securities to be bought or sold or even extend the validity period of the order. As long as the order has not yet been executed, you can usually make these changes directly in your broker's trading platform.

• Cancelling a limit order: If you want to change your strategy or the market develops unfavourably, you can also cancel the limit order at any time. This can also be done easily via your broker as long as the order has not already been executed. Cancellation is usually immediate and without additional costs.

This flexibility helps you to react to market movements without committing to your original order. Especially in volatile markets, it is important to regularly check whether your limit orders still fit your current strategy and to adjust or cancel them if necessary.

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Summary: Use limit orders strategically to get the most out of your portfolio

Limit orders can be an effective tool to minimise risk, for example when trading cryptocurrencies. At the same time, they can help you keep control of the price at which you buy or sell. By being able to set a fixed limit price, you can benefit from not overpaying or selling at an unfavourable price. Especially in volatile markets, limit orders offer flexibility and can protect you from unexpected price fluctuations. Limit orders should be used strategically. Despite many advantages, there are potential risks such as non-execution or missed opportunities. With the right planning, limit orders can be used specifically to optimise your trading results.

In addition to limit orders, there are a variety of other order types and advanced strategies that can help you achieve your trading goals. Therefore, exploring these and continuously expanding your knowledge can be worth exploring to be even more successful in the market.

Further topics relating to order types

Are you interested in what tactics you can use to gain more control over your investments and benefit from positive cryptocurrency price trends? In the Bitpanda Academy you will find a variety of guides and tutorials that will give you deeper insights into topics such as blockchain networks, crypto trading and much more.