Limit orders are pending orders with a specific price for the purchase or sale of stocks or other financial assets.
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Definition of limit orders
A limit order is a trader’s instruction to an exchange or a broker to execute a trade at a specific, more profitable price for the trader. The trader sets a specific price (a limit) at which they are willing to buy or sell the financial instrument, and their order will be automatically executed when and if the price reaches this level.
What limit orders are used for
- Price control. Traders use limit orders to avoid selling or buying an asset at an unfair price and to limit potential losses
- Slippage avoidance. Executing limit orders at a specified price helps minimise the risk of unforeseen price changes between order placement and execution
- Automation of trading strategies. Traders can automate the purchase or sale of assets according to their strategies
- Planning. The use of limit orders in trading allows traders to plan their transactions and investment decisions
Types of limit orders
- Buy Limit Order. This order type is used by a trader to buy an asset at a price they specify. The order is executed when the asset’s price reaches the level set by the trader. A Buy Limit is placed below the current asset price.
- Sell Limit Order. This order type is used by a trader to sell an asset at a price they specify. The order is executed when the asset’s price reaches the level set by the trader. A Sell Limit is placed above the current asset price.
Example of a Buy Limit Order
A trader wants to buy shares of NVIDIA Corporation (NASDAQ: NVDA) for 455.50 USD per unit, while the current price is 460.00 USD. The trader places a Buy Limit order at 455.50 USD, instructing the broker to execute the order as soon as the price reaches this value. When the stock price of NVIDIA Corporation reaches the specified mark, the Buy Limit order will be executed, and a buying position will appear in the terminal.
Example of a Sell Limit Order
A trader wants to sell shares of Advanced Micro Devices Inc. (NASDAQ: AMD) for 109.00 USD per unit, while the current price is 107.00 USD. The trader places a Sell Limit order at 109.00 USD, which the broker must execute as soon as the price of the asset reaches this value. When the stock price of Advanced Micro Devices Inc. reaches the specified mark, the Sell Limit order will be executed, and a selling position will appear in the terminal.