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What Is a Limit Order?

A limit order refers to an order that is placed on the order book with a specific price limit. You determine the limit price on your own. It is only when the market price reaches your limit price (or better) that the trade will be executed. Limit orders are used to purchase at a lower price or to sell at a higher price than market price at certain times in the future.

 

Contrary to market orders, which are executed instantly based on the current market price, limit orders are entered into the order book and are not immediately executed. you are carrying out your trades as a maker rather than a taker means you will pay lower fees when using limit orders.

Introduction

When it comes to buying bitcoin (BTC) or ether (ETH), do you find it difficult to decide which order type will be most appropriate? Different order types can affect your trades in different ways. That is why it is imperative to know what the differences are between these order types before placing your order. If you're looking for greater control over your trades, you might consider using limit orders to cap the price at which you can buy or sell a coin.

What is a limit order?

The term limit order refers to an order with a specific buy or sell price. A limit order is a method of placing an order with a maximum or minimum price that you intend to pay for or sell an asset . Your order will then be entered into the order book, and it will be executed only in the event that the market price reaches the limit price (or even better).

 

A limit order is different from a market order where trades are executed immediately at the current price, with a limit order you can choose which price you want to be executed at. The use of limit orders is fully automated, so you do not have to monitor the market 24 hours a day or to worry about missing a buy or sell opportunity while you are sleeping.

 

Even if you place a limit order, there is no guarantee that it will be executed. It is possible, however, that the market price will never reach the limit price, and thus, your trade will remain unfilled on the order book. In general, limit orders may be placed for up to a few months, depending on the cryptocurrency exchange you are using.

How does a limit order work?

Limit orders will be immediately entered in the order book after submission. Nevertheless, it will not be able to be filled until the coin price reaches the specified limit price (or even higher). Suppose, for example, that you want to sell 10 BNBs for $600, but the current selling price is $500. Then you may place a limit order to sell 10 BNB for $600. The BNB price will be executed depending on market liquidity when the target price is reached or above the target price. In the event that there are other BNB sellers placing their sell orders ahead of yours, the system will execute those sellers' orders first. The remaining liquidity in the BNB market will then be allocated to your limit order.

 

The order's expiration date is another thing that needs to be considered when putting in a limit order. On average, limit orders are good for up to 90 days. The volatility of the market may result in you buying or selling at an unpredictably lower price if you don't pay attention to the market closely. For example, if the current market price for BNB is $500, you have placed a sell limit order for 10 BNB at a price of $600. After a week, the BNB price went up to $700.  In the event the current price of the market crosses above the limit price you set, your order will be executed at $600. In this case, your profits were restricted by the target price you set a week ago. Therefore, it is recommended that you periodically review your open limit orders to remain current with the ever-changing market conditions.

Stop-loss vs. limit orders

Trading crypto involves a variety of orders such as limit, stop-loss, and stop-limit, and there are a number of them that you can use. When a stop-loss order is triggered, the market sends a signal that the market has reached the stop price. A stop order lets you buy or sell a coin at the market price as soon as the price of the coin reaches the stop price you set.

 

If a stop-loss order is triggered, the order converts to a market order and executes at the current price of the market. The execution of your order will not take place if the stop price is not reached. The use of sell stop orders can help you minimize potential losses, should the market move against your position. It is also possible to use them as "take-profit" orders when exiting a position so as to protect any unrealized profits. A buy stop order can also be used to enter the market at a lower price.

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Basically, the key difference between a limit order and a stop-loss order is that a limit order will execute at the price you set (or better), while a stop-loss order will execute (as a market order) at the current market price. However, if the market price changes too rapidly, your order might be filled at a price different from the trigger price.

Stop-limit vs. limit orders

Stop-limit orders combine the functions of a stop order and a limit order. When the stop price is reached, it will automatically trigger a limit order, which will allow the trader to execute the trade. If the market price matches the limit price or is higher, the order will execute. You can use stop-limit orders to limit the losses you may incur on a trade if you do not have the time to continually monitor your portfolio.

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To place a stop-limit order, you have to define two prices: one is the stop price, and the other is the limit price. There is a big difference between stop-limit orders and limit orders because the former only places a limit order if a stop price is reached, while the latter will place an order on the order book instantly. Consider the following example: If BNB is trading at $600 and you place a sell stop-limit order with the stop price at $590. If BNB drops below $590, then the system will automatically set up a sell limit order based on the limit price you specified (for example, $585) or higher, so what happens in this case is that you don't have to do anything. It is important to keep in mind that there is no guarantee that your order will be filled. In the event that the market moves too fast, it is possible for your order not to be filled.

When to use a limit order?

When should you use a limit order:

  • There is a specific price at which you want to buy, or a specific price at which you want to sell, below or above what the current market price.

  • It is not a necessity for you to buy or sell immediately

  • You want to lock in unrealized profits or minimize potential losses.

  • To achieve a dollar-cost-averaging (DCA) effect, you wish to split your orders into smaller limit orders.

 

Even if the limit price is reached for your order, it doesn't mean that it will always be fulfilled. This depends on market conditions and liquidity in general. Limit orders might not always be fully filled.

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