Are you a Savvy trader? Do you use Limit Orders? Read on... Find out how and when to use it? How to maximize your gains with Limit Orders? What are the risks with a Limit Order? Why should you care about it? What other special instructions apply to the Limit Order?
Once you trade, you might find that just using the market order limits your ability to maximize your gains. When you are new to trading, you might come across a signal and it will tempt you to react immediately, press the buy or sell order. You don't want to miss out on the opportunity. This is normal, Once you improve your trading skills, you will gradually able to evaluate the trade and determine your entry and exit points. You are no longer in a hurry to enter the trade. You work according to your trading plan.
The Limit order is the tool for advanced traders. You will improve your skills and add more tools to your trading toolkit. You will graduate from a haphazard trader to a more mature one; you will soon use and realize the need for Limit orders.
Limit Order
Buy or Sell orders at your Bid and Ask prices, not the current market price. When you buy, you buy at your Bid, not at the current market Ask, and when you sell, you sell at your Ask, not at the current market Bid.
Before getting into Limit order, you need to understand the Bid and Ask concepts. When you are trading or taking part in a market transaction, you are synonymous with the market. The market has a Bid and Ask for the commodity. If you are trading currencies, say EURUSD, there is a Bid and Ask the market has determined for EURUSD. This is the market price for EURUSD. When you trade using market orders, you adhere to the Bid and Ask of the market. You are synonymous with the market, and you can set your Bid and Ask. You will use Limit Order to set your Bid and Ask. When you buy you will buy at your Bid, not at the current market Ask, and when you sell, you sell at your Ask, not at the current market Bid.
Buy Limit Order
Buy order when you specify the limit price (your bid) which is lower than the current Ask price of the market. The order will be executed at or below the limit price.
EURUSD is trading at 1.1745. The market is in an uptrend. There are more buys for EUR against the USD. The market Ask for EURUSD is 1.1745. You looked at the chart and noticed that the market will pull back soon. You placed your buy order at your Bid at 1.1740, which is 5 pips lower than the Ask of the market. This is a Buy Limit order. Your order will get executed as the market pulls back and hits your Bid. Your order will be filled at or below the Limit price. This is how the Buy Limit order works.
See below the order ticket for a Buy Limit order for USDCHF. Market Ask is 0.91271. The Limit price in the order ticket is 0.91200. The Limit order is placed 7 pips below the Market Ask.
After the order is placed, it displays the Buy Limit in the chart. The trade will be executed as the market pulls back to the limit price.
Buy Limit Order Characteristics
Buy limit order will only execute at the limit price or lower
Buy limit order does not guarantee its execution
Buy limit order ensures that there is no slippage, that means you do not pay more than what you intended to pay for the trade
Sell Limit Order
Sell order when you specify the limit price (your ask) which is higher than the current bid price of the market. The order will be executed at or above the limit price.
Short sales use Sell Limit orders. You are trading in a downtrend and you noticed that there will be a pullback. You will place your sell order above the current market bid. This will be your limit price. Your sell limit order will be executed at or above your limit price. The limit you specified in your sell order is your Ask price.
Let's look at the example of EURUSD. The market is in a downtrend. EURUSD is trading at 1.1735. This is the bid price of the market. If you sell at the market, this is what your short position for EURUSD will be. You looked at the chart and noticed that the market will pull back soon. You intend to sell at the pullback and not at the market. You will place the sell order with a limit price of 1.1750. This is your Ask price for EURUSD. This is 15 pips higher than the current market bid. The sell order will get executed as the market pulls back 15 pips to your limit price. This is a Sell Limit order. Your order will get executed as the market pulls back and hits your Ask. Your order will be filled at or above the limit price. This is how the Sell Limit order works.
See below the order ticket for a Sell Limit order for AUDUSD. The market is in a downtrend. Ask is 0.71554. The Limit price in the order ticket is 0.71617. The Limit order is placed 6 pips above the Market Bid. The Market is in a pullback.
After the order is placed, it displayed the Sell Limit order in the chart. The sell limit order will get executed at the pullback at a higher price than the market bid.
Sell Limit Order Characteristics
Sell limit order will only execute at or above the limit price.
Sell limit order does not guarantee its execution
Sell limit order ensures there is no slippage that means the sale price will never be less than your ask price.
When you should use Limit Orders?
When you do not want any slippage
Limit orders will eliminate slippage. The order will execute at or above for Sells and at or below for Buys, which is equivalent to or better than the limit price specified.
When the market is illiquid
When the market is illiquid, your buy or sell-order could create an irrational movement in the direction you placed your order. You see that the market price has varied significantly. By using limit orders, your order will not execute if the price is not in your favor.
When the trade size is large
Partial fill is a possibility for your order at the limit price. Limit orders ensure that the rest of the order is not filled at an unfavorable price. You will have the control to split the order and manage the execution price.
Special Instructions for Limit Order
Limit order that did not execute.
A limit order that did not execute is a sign that the market is transitioning to a new trend or the trade did not work out as planned. Evaluate the market and move to the next opportunity.
Use timing instruction of DAY for Limit orders.
DAY orders that haven’t been executed are canceled at the close of the trading day. GTC or Good till Cancelled orders are not good for Limit orders. The market conditions can change in short durations. Evaluate the market to make sure the opportunity is still valid for the limit order. If the market has changed direction or moved to a new pattern, then the opportunity and the limit order may not be valid any longer. Use DAY instructions to make sure that the limit order will be canceled before the close of the trading day.
The Limit order is partially executed.
It shows there are not enough buyers or sellers to fill the order at your limit price. Split the order into multiple lots and use staggered limits to place the order.
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