Mastering Limit Orders for Success in stock Market
Limit order
A limit order is a type of order used in trading financial instruments like stocks, cryptocurrencies, or commodities and also use in future and options . It allows you to specify the maximum price you're willing to pay when buying or the minimum price you're willing to accept when selling.
A buy limit order executes only at the limit price or lower.
A sell limit order executes only at the limit price or higher.
Unlike a market order, which executes immediately at the current price, a limit order ensures better price control but does not guarantee execution.
Step-by-Step Process:
1. Placing the Order:
o The trader sets a price limit when entering the order.
o For a buy limit order, the price must drop to or below the limit price.
o For a sell limit order, the price must rise to or above the limit price.
2. Order Queuing:
o The order is placed in the order book and waits for the market to reach the specified price.
o If multiple limit orders exist at the same price, they are executed in the order they were received (first come, first served).
3. Execution or Expiry:
o If the market reaches the limit price, the order is executed.
How a Limit Order Works
A limit order works by allowing traders to set a specific price at which they want to buy or sell a stock. The order will only execute if the stock reaches the set price or better.Step-by-Step Process:
1. Placing the Order:
o The trader sets a price limit when entering the order.
o For a buy limit order, the price must drop to or below the limit price.
o For a sell limit order, the price must rise to or above the limit price.
2. Order Queuing:
o The order is placed in the order book and waits for the market to reach the specified price.
o If multiple limit orders exist at the same price, they are executed in the order they were received (first come, first served).
3. Execution or Expiry:
o If the market reaches the limit price, the order is executed.
o If the price does not reach the limit level, the order remains open or expires (depending on the chosen order duration, such as "Good Till Cancelled" or "Day Order").
Suppose company XYZ stock is trade at price 100 Rs
o You believe the stock is overpriced and want to buy it only if it drops to 95 Rs
o You place a buy limit order at 95 Rs.
o If the price fall down at 95 Rs your order well be executed.
2. Sell Limit order
Suppose company XYZ stock is trade at price 100 Rs
o You want to sell the stock only if it rises to 110 Rs.
o You place a sell limit order at 110 Rs.
o If the price rise upside at price of 110 Rs your order well be executed
Advantage of limit order
Batter Price Control - o Ensures you don’t pay more (or sell for less) than you want.
Avoid Slippage – Unlike market orders, which can execute at unexpected prices during high volatility, limit orders guarantee a set price.
Usefull for Strategic Trading – Helps investors buy low and sell high without actively monitoring the market.
Disadvantage of limit order
No Guarantee of Execution – If the stock never reaches your specified price, the order won’t be filled.
Partial Fills Possible – If only part of your order is executed, you may have to wait for the rest to fill or cancel the remaining order
May Miss Quick Price Movements – If the stock price moves quickly past your limit price, a market order might have executed, but a limit order may not.
