What is a limit order and how do you place one?

What is a limit order?

A limit order, sometimes called a limit-entry order, is an instruction to your trading broker to open a trade when the market level reaches a better, preselected price. If you’re buying, ‘better’ means a lower price but if you’re selling, it means a higher price. You can place a good-till-cancelled or good-till-date order – but selecting a price that’s better than the current price will always be a limit order. If the price you set is worse, it’s a stop order.

What’s the difference between a limit order and a limit?

While a limit order is a type of working order, a limit (also called a take-profit) is a risk management tool that you can attach to your trades to safeguard potential profits once the position is open.

For example, for a short position on Tesla shares, you can set a limit at a lower price that’ll automatically close out your position if the share price hits this level or gaps beyond it. You can place a take-profit on a leveraged limit order, but the position won’t be open until the price level you set is reached – so, the limit (take-profit) won’t affect the trade until it’s filled.

Example of a limit order

Let’s say you want to go long on Apple shares with CFDs. You’ve conducted your own analysis and believe that Apple shares will likely go up briefly in a ‘dead cat bounce’, then fall again. Your prediction is that this will happen when the Apple share price reaches 9,920.

So, you decide to open a CFD position at $10 per point and set up a limit entry order to automatically buy (go long on) 10 Apple shares when the price hits 9,920 (buy price 9,950 and sell price 9,890). The margin requirement is 20%, so you’ll have to put down $19,900 to open your position ([9,950 buy price x 10 shares] x 20%).

After a few days, Apple’s share price hits 9,920 as predicted and your limit entry order takes effect, automatically buying 10 Apple shares. You decide that you want to close the position when the price reaches 11,080 (buy price 11,110 and sell price 11,050), so you set a limit close order.

If the Apple share price climbs to 11,080, your limit closing order will automatically close out the trade, locking in your profits of $11,000 (11,050 sell price – 9,950 original buy price = 1,100 points x $10 per point).

Benefits and risks of a limit order

Benefits of using limit orders

• You won’t need to constantly monitor the market, waiting and checking to manually open a trade at your preferred opening price
• In the case of very volatile markets, this could even lead to a phenomenon called ‘positive slippage’ – where the market suddenly moves beyond your set amount, fulfilling your order at an even better price

Risks of using limit orders

• There’s the chance that a position may never be opened, which could affect your trading strategy, because a limit order is ‘your price or better’
• Limit orders don’t necessarily protect against losses – for that, you’ll need a stop-loss. However, a stop order (ie stop-entry order) could act as a stop loss if you set a working order to ‘net off’. While this is also possible on contract for difference (CFD) trading with us, it’s generally not an efficient way to go about it