A limit order is a financial order where investors set the parameters of their purchase or sell orders. Limit orders allow an investor to set the price limit for buying or selling an asset.
How Do Limit Orders Work?
Limit orders are a unique form of trading in financial markets. The idea is to ensure the buyer or seller has a price guarantee of better prices in the market.
Let’s say a trader intends to buy ETH coin, and that ETH is trading at $3,970 per coin. They set their limit price when creating the trade to the amount they’d most prefer to work with. The trader can set the limit order to $3900 and purchase Ethereum at that value or even lower.
Hence, at the end of the buy trade, the investor purchases assets at a lower price. There are two types of limit orders, namely;
- Buy limit orders. They involve purchasing an asset. It’s where an investor sets their maximum purchase price and will only purchase assets at the precise price or lower.
- Sell limit orders. This is mainly focused on the selling of a particular crypto asset. The trader sets the minimum price at which they are willing to sell the assets.
Benefits and Drawbacks of Limit Orders
The primary benefit of limit orders is that traders can choose the price. As mentioned earlier, limit orders allow investors to provide low and high prices. Moreover, in the limit order trades, traders can generate more profit. They can set limits that leave them in a promising investment position.
Limit orders also help traders invest and wait for passive income. The investor does not need to wait till the trade completes. After setting the threshold, the investor can leave.
Volatility is a menace in the crypto space. However, limit orders can help hedge against volatility, thus reducing its impact on trade.
Of course, with the benefits also come the drawbacks. So here are a few disadvantages associated with this trading system;
- The order might risk not being executed since the stock could not reach the limit price.
- Crypto markets are highly volatile so the markets can change faster than the limit order price.
- Need vast market expertise.