It is type of order that is placed at certain price to sell or buy a specific security. In case of buy, order is place below the current market price while in case of sell, limit order is place above the current market price. This technique allows the investors to better control the price they trade. If the current market price does not reach buy or sell limit order, the order will not fulfill and trader may miss out the trading opportunity.
Usually limit order is placed when market price of certain securities is rising or falling very quickly and trader is fearful of getting a bad entry in market. The limit order is useful if trader is not watching trading market but has specific price in mind of certain security at which they would be happy to sell or buy that security.
Limit Order Example – Just suppose that currency pair of GBP/JPY is currently trading at 131.500. You are not sure to place a sell or buy order at that current market price. But you identify that, price will reverse from market price of 131.930. Thus limit order technique assist to place sell limit order at 131.930. If price of GBP/JPY goes up and hit that limit, your order will automatically executed at that price. Same is for buy limit order. Buy limit order will be place lower than the current market price.
- Limit orders must be used in conjunction with stop orders to prevent large downsize losses.