What is a Limit Order?
A limit order is a type of order used in trading to buy or sell an asset at a specific price or better. Unlike market orders, which execute immediately at the best available price, limit orders ensure that traders only buy or sell at their desired price level. This allows traders to have more control over their trades, avoiding unexpected price changes.
However, a limit order is not guaranteed to execute if the market price never reaches the specified level. For instance, if a trader places a limit buy order for Bitcoin at $40,000 but the price never drops to that level, the order will remain unfilled. To define limit order, think of it as setting a price limit for your trade, as opposed to using the market price like you would do with a market order. Limit orders are commonly used in both stock and cryptocurrency markets to optimize trade execution.
Key Takeaways
A limit order is a trade order to buy or sell an asset at a specific price or better.
Market orders execute instantly at the best price, while limit orders wait for the set price to be met, if ever.
Use limit orders for precise price execution and market orders for immediate trades.
Limit orders often have lower fees as they add liquidity, while market orders may incur higher fees by making you a taker.
Limit orders add liquidity to the order book, while stop orders trigger a market order once the stop price is reached, taking liquidity.
How Do Limit Orders Work?
If someone asks you "How does a limit order work?", here's the simplest way to explain. When you place a limit order, you offer to purchase or sell a certain amount at a specific price, and other market participants sell or buy from you until none is left.
By making this offer, you add liquidity to the order book, and therefore on a centralized exchange you will pay a maker fee when the trade is executed. If no other trader takes your offer, the order will remain active until canceled or adjusted, and you won't pay any fees.
Now, what if two limit orders execute each other? Let's say you place a limit buy order, and it's the best price in the market (also known as the bid price). If another trader places a limit sell order at a lower price, their limit order will execute at the price of your existing offer and they will pay a taker fee, which is usually higher.
Limit Order vs Market Order
The primary distinction between a limit order vs market order lies in execution mechanics:
A limit order is filled at the desired price or better, while a market order will execute at the current market price or worse due to slippage, especially in volatile markets.
A limit order is only filled when the market reaches the desired price, which may never happen. A market order executes immediately
A limit order can be partially filled, and if the market price swings in the opposite direction, it will remain active until fully executed, while a market order is always filled in its entirety.
A limit order adds liquidity to the order book, while a market order takes existing liquidity
A limit order will usually incur maker fees, while market orders always make you a taker.
Limit orders are preferred for traders who want precise price control, whereas market orders are used when quick execution is critical.
Market Order vs Limit Order Examples
The market price of Ethereum is $3,300. A trader holds Ethereum and wants to sell it for $3,500. By placing a limit sell order at $3,500, they guarantee execution only at that price when the market price hits $3,500. If they instead use a market sell order, the ETH will be immediately sold at $3,300, which may result in a loss.
A trader wants to purchase 3 BTC at $90,000 but when they check the order book, they see that only 1 BTC is available at that price. They place a limit buy order at $90,000, and the order is partially filled, removing the 1 BTC from the ask side of the order book, while the remaining 2 BTC are added to the bid side of the order book. Conversely, if they use a market buy order, 1 BTC will be immediately bought at $90,000, and the remaining 2 BTC will be bought at a worse price right after.
Market or Limit Order: Which One Should You Choose?
Choosing between a market or limit order depends on trading goals:
Price vs. Speed: Market orders execute immediately at the best available price, making them ideal for traders prioritizing speed. Limit orders ensure price control by executing only at the specified price or better, reducing the risk of overpaying or selling too low.
Fees: Trading platforms often charge higher fees for market orders since they remove liquidity from the order book, making you a taker. Limit orders, on the other hand, add liquidity and usually incur lower fees, making you a maker.
Limit Order vs Stop Order
A stop order is a type of trade order that becomes a market order once a specified price, called the stop price, is reached.
Stop and limit orders are both used for managing trade execution, but they work differently:
A limit order is executed when other market participants take it, while a stop order is triggered when the market reaches a specified price, and then is instantly executed like a market order.
A limit order is price-restricted and will never execute at a worse price, while a stop order becomes a market order once the stop price is reached and is then executed immediately at any available price, ignoring slippage.
A limit order can be filled partially if only a portion of the amount is used by other traders, while a stop order is filled in its entirety as soon as the stop price is reached.
A limit order appears in the order book and adds liquidity to the market, while a stop order is not visible in the order book and takes existing liquidity when activated.
A limit order generally incurs maker fees, while a stop order always incurs taker fees after it becomes a market order.
Limit orders are used to ensure precise execution at a desired price, whereas stop orders are mainly used to limit losses or protect profits when the market moves against their position.
Limit and Stop Order Examples
Stop and Limit orders are used in different scenarios. Here are some limit and stop order examples in practice:
A trader wants to buy Ethereum at $3,000 but not higher, so they set a limit buy order at that price. The order appears in the order book. The order only executes if Ethereum reaches $3,000 or lower. Alternatively, they could set a stop buy order at $3,000, which would trigger a market buy if the price is reached, executing at the best price available in the order book.
A trader owns Bitcoin and wants to sell it at $100,000, so they place a limit sell order. If Bitcoin surpasses that price, the order is filled at exactly $100,000. However, if the market price just briefly touches that price point, the order may only be filled partially if at all (which may be the case if other traders offer a large amount of BTC at the same price), leaving the order active until fully executed. If the trader places a stop sell order instead, their BTC will be sold as soon as the market price hits $100,000, but the final price of the trade may slip below the desired price.
Limit Order vs Stop Limit Order
A stop-limit order combines aspects of both stop and limit orders. It activates once the stop price is hit but instead of becoming a market order, it becomes a limit order. This provides additional control over trade execution but can result in unfilled orders if the limit price is not reached.
The key differences are:
A limit order is placed in the order book immediately, while a stop-limit order is only added when the stop price is reached.
A limit order is always executed if the market price surpasses the limit price, while a stop-limit order will not execute at the desired price if the stop price has not been reached yet.
Limit orders are used to execute a trade at an exact price as soon as possible, whereas stop-limit orders are used to automatically set a limit order only if the market hits the stop price.
Limit and Stop-Limit Order Examples
Here are some limit and stop limit order examples:
A trader owns a token that just pumped in a market with low liquidity and decides that if the price hits $55, it's time to sell. They can place a limit sell order at $55 to sell when the price hits that mark, but there may not be enough liquidity to sell the whole amount exactly at $55. Instead, they can place a stop-limit sell order with a stop price of $55 and a limit price of $52, ensuring that if the price hits $55, the token will be sold at no less than $52.
The current price of Bitcoin is $95,000. A trader wants to sell their BTC at $103,000, but they expect that the price may not break the resistance level at $100,000, so $98,000 is acceptable too. They have two options. One is to place a single sell limit order at $103,000 and closely monitor the market to adjust the order if necessary. Another option is to place two sell stop-limit orders: one with a stop price of $99,500 and a limit price of $98,000 in case the price goes down, and another one with a stop price of $101,000 and a limit price of $103,000 in case Bitcoin breaks the resistance level.
How to Use Limit Orders When Trading
Understanding how to use limit orders when trading can help improve trading strategies. Here are some tips to effectively use limit orders:
Place a limit buy order at a strong support level to buy an asset at a lower price.
Use a limit sell order at a resistance level to secure profits before the price drops.
Seize opportunities by setting limit orders further from the market price in case the price fluctuates.
Set multiple buy or multiple sell limit orders at various prices to minimize risk and secure profits.
Place limit orders that add liquidity to the order book to save on trading platform fees.
Avoid unnecessary slippage by not relying on market orders when you have a specific price in mind.
Bottom Line
A limit order is a powerful trading tool that gives traders more control over the execution price of their trades. Unlike market orders, limit orders do not guarantee immediate execution but help prevent slippage and ensure price accuracy. Choosing between a market vs limit order depends on whether speed or price control is the priority. Additionally, understanding limit and stop orders can help traders protect their investments and execute more strategic trades. Whether setting a limit buy order or a limit sell order, using these tools wisely can enhance trading performance in both crypto and traditional markets.
