What is Limit Order
A limit order is a trading order to buy or sell a cryptocurrency at a specific price or better. This type of order allows traders to set the maximum price they are willing to pay when buying or the minimum price they are willing to accept when selling. Limit orders are widely used in cryptocurrency exchanges to provide control over the execution price and to mitigate the risks associated with market volatility.
The concept of limit orders has its origins in traditional financial markets, where they have been utilized for decades. They empower traders to execute their strategies more effectively by allowing them to dictate the terms of their trades rather than accepting the current market price. In the cryptocurrency sphere, where price fluctuations can be extreme, limit orders are particularly beneficial for investors seeking to manage their entry and exit points.
What are the types of Limit Orders?
There are primarily two types of limit orders: buy limit orders and sell limit orders.
Buy Limit Order: This order is placed to purchase a cryptocurrency at a specified price or lower. For instance, if a trader sets a buy limit order for Bitcoin at $30,000, the order will only be executed if the price drops to $30,000 or below.
Sell Limit Order: This order is placed to sell a cryptocurrency at a specified price or higher. For example, if a trader sets a sell limit order for Ethereum at $2,000, the order will only be executed if the price rises to $2,000 or above.
How does Limit Order work?
When a trader places a limit order, it is sent to the order book of the exchange. The order will remain open until it is either executed at the specified price or canceled by the trader. If the market reaches the price specified in the limit order, the order gets matched with existing market orders, and the trade is executed.
Limit orders do not guarantee immediate execution, especially in a rapidly changing market. If the market price does not reach the limit price, the order remains unfilled. This can be advantageous in a volatile market, as it allows traders to avoid buying at inflated prices or selling at depressed prices. However, it also poses the risk of missing out on trades altogether if market conditions change rapidly.
Where is Limit Order used?
Example 1: A trader places a buy limit order for Bitcoin at $28,000. The current market price is $29,500. The order remains open until BTC drops to $28,000, at which point it executes.
Example 2: A trader sets a sell limit order for Ethereum at $2,500 when the market price is $2,400. The order fills as soon as ETH rises to $2,500, securing a profit of approximately 4.17%.
Example 3: On a popular exchange, a trader submits a buy limit order for Cardano at $0.50. The order is filled when ADA's price dips to $0.50, allowing the trader to accumulate 1000 ADA, which is valued at $500.
