What is a Limit Order?
An order is an instruction to buy or sell at a trading place such as a stock market, market for shares, the market for commodities, the market for financial instruments or exchange for cryptocurrencies. These instructions can be easy or complicated and can be sent via direct market access to either a broker or directly to a trading venue. It is called a limit order.
Suppose an investor in cryptocurrencies or stocks is willing to pay $20, and no more. In this case, the investor can set a limit order of $20, at which the cryptocurrency
or stock will be purchased. As soon as the value of the cryptocurrency or share reaches this price, it will be bought automatically. For this, the investor does not need to do anything more. The broker or crypto exchange is the one that takes care of this automatically.
With a limit order, you can set a price at which a certain action can be executed. This action is always to buy or sell a cryptocurrency or share. This has advantages for both the buyer and the seller of the cryptocurrency.
The biggest advantage of a limit order is that buyers of a cryptocurrency do not overpay for a cryptocurrency. Suppose you want to pay a maximum of $400 for a cryptocurrency, and the current value is $430. You can choose to pay more or set a limit order. At a crypto exchange like Coinmerce, you then set it to automatically buy the crypto coin when it reaches a value of $400. If that happens, Coinmerce will purchase the cryptocurrency for you. You don't have to do anything for this yourself. You don't even have to be present for it.
Limit Orders on the stock market
The limit order comes in kind from the stock market. This is where the limit order originated. Here investors can buy shares at a certain price, which is better for the buyer of the share. Investors can also use a limit order to sell their shares again.
It is not the case that limit orders always guarantee a positive effect. However, an investor has more control over the buying and selling of the shares of his choice.
This is how a Limit Order is used on the stock market
Suppose the portfolio manager wants to buy shares of Tesla Inc (TSLA) but finds the current price of $325 per share too high. Therefore, he would like to buy the shares at a lower price. He decides to set a limit order at a price of $280 per share, and then wants to buy 10,000 shares. This means that the investor considers the stock undervalued when it reaches a price of $280. This order is not stopped until the investor cancels the order, or until the set time has expired.
Limit orders for cryptocurrencies
Limit orders are also used for cryptocurrencies. This type of order is becoming more and more popular, and therefore investors can invest in cryptocurrencies like Bitcoin
more and more easily and specifically. Thus, you can also use different types of limit orders at Coinmerce. We'll explain to you step by step how to do that at the end of this article!
Types of Limit Orders
There are different kinds of limit orders. These orders make sure that you can enjoy the advantages of trading stocks and cryptocurrencies even more. That's why it's important to know what the different orders are and what they imply. You will then make it a lot easier for yourself.
Limit Order to Sell
A limit order to sell is exactly the same as a normal limit order that you use for buying cryptocurrencies. However, you can also come across this type of limit order under the name 'limit order to sell'.
Limit Order to Buy
When we use a limit order to buy crypto coins, we also speak of a 'limit order to buy'. In fact, it is a normal limit order that we use to buy cryptocurrencies.
Stop Limit Order
Stop limit orders are similar to stop-loss orders, but there is a limit to the price at which they are executed, as the name suggests. A stop-limit order specifies two prices; the stop price, which converts the order into a sell order, and the limit price. The sell order becomes a limit order instead of the order being a business order to sell, which can only be fulfilled at (or better than) the limit price.
There is no guarantee that this order will be fulfilled, especially if the cryptocurrency is rising or falling rapidly. Stop limit orders are often used when the investor does not want to sell if the crypto coins do not have the value the investor would like.
If the stock price falls below the limit price, many investors would cancel their limit orders. This makes sense because when the price falls, they are only putting them in to limit their losses. They will then just wait for the price to go back up, having missed their chance to get out, and not wanting to sell it at that ceiling price at that point in case the stock continues to rise.
For example, you could place a stop-limit order to buy 100 Ethereum coins. You set that you want to buy the Ethereum coins when it reaches a price of $1000. This is the stop price. However, you do not want to pay too much and set a limit of $1005. The moment the price rises above $1005 the order are cancelled.
It is especially useful to use a stop-limit order for cryptocurrencies that rise and fall very quickly in value. In this way, you reduce the risk of paying too much for a cryptocurrency.
When the investor owns his shares, he can set a limit order at $410 per share. At this price, the investor finds the stock overvalued, and wants to sell them immediately. With the limit order, the investor has made a profit of $130 per share.
Stop Limit Sell Order
With the stop-limit order, we were talking about buying crypto coins. Specifically, we were talking about Ethereum. However, you can also use a stop-limit order to buy crypto coins. This is specifically called a stop limit sell order. Here you set two different prices, the stop price and limit price.
Suppose you have succeeded in buying the 100 Ethereum coins. However, now you also want to sell them again by means of a stop limit sell order. The current price is at $1200 and set the stop price at $1230, and a limit price at $1225. The moment the price reaches a high of $1230, the coins are put on sale. However, if the price quickly drops below $1225 again, the order is stopped. This way you avoid a loss.
Limit Order vs. Market Order
When an investor places an order to buy or sell shares, he can do this in two ways: using a limit order or using a market order. There is a big difference between these two types of orders, both in the stock market and in the crypto world.
Market orders are by far the most commonly used type of orders. When you use this type of order, you buy or sell your crypto coins for the market price that is in effect at the time. The market price can vary from one crypto exchange to another. On CoinMarketCap you can see an average of the market prices of cryptocurrencies on different crypto exchanges.
For example, you might decide to buy 1000 Ripple XRP
coins. You think that the price of the exchange is the correct price, and therefore you want to open them as soon as possible. In this case, you place a market order, after which the coins are purchased at the current market price.
Although market orders offer great commercial opportunities, there is no guarantee that they will actually succeed. All exchange transactions are subject to the availability of the shares on offer and can vary significantly depending on the time of day, order size and stock availability. All orders are processed within the current priority guidelines.
Whenever a market order is placed, there is always the threat of market fluctuations occurring during the time the seller receives the order and the time the transaction takes place. This is especially true for large orders that take a long time to process.
The difference between limit orders and market orders is probably clear to you by now. With limit orders, you can set in advance the price at which you want to buy or sell a cryptocurrency, while with market orders you buy or sell the cryptocurrency at the market price. Both types of orders have their advantages and disadvantages. The type of investor you are determines which order suits you best.