What is a limit order?
With a limit order, you set the maximum purchase price or the minimum sale price at which a trade is to be executed.
As a limit order must be entered away from the current market price, it may not be executed immediately. In other words, you give up certainty of execution in the hope of receiving an improved price in the future. Limit orders can be either Buy Limit Orders or Sell Limit Orders depending on the direction of your trade.
Buy Limit Order
An instruction to buy only if the price reaches or falls below the limit price. The limit price must be set below the current market price. Assume you want to go long EUR and the current bid/ask price for EUR/USD is 1.1999/22. If the maximum price you can afford is 1.2000, you should the limit price at that level. Your order won’t be filled unless EUR reaches that level. In other words, a Buy Limit Order can help you avoid negative slippage and open a position gradually.
Sell Limit Order (Take Profit or T/P Order)
An instruction to sell only if the price reaches or exceeds the limit price. The limit price must be set above the current market price. Assume you go long EUR at 1.2000 on a 1:100 leverage ratio and target at least a 25% return on your investment, you should set the limit price at 1.2030 (or 30 pips above the market price). You position will close out and lock-in that return if prices reach or exceed that price. Set the limit price as high or as low to reach an ROI threshold. Note that this example ignores broker costs for simplicity.
Pros and cons of Limit Orders
- No uncertainty surrounding the fill price with Buy Limit Orders.
- Lock-in profits with Take Profit Orders.
- No certainty of execution.
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