Limit Order
A Limit Order is a type of order that you can place on a cryptocurrency exchange to buy or sell a specific amount of a particular digital currency (like Bitcoin) at a certain price. This order type allows traders to better control the prices at which they trade.
Understanding a Limit Order
When you set a Limit Order, you basically instruct an exchange to trade a certain amount of your cryptocurrency when the market price reaches your specified price (the limit price). It is different from a market order, which executes at the best available market price and often immediately.
- If you’re buying, the limit order will only be executed at the limit price or lower.
- If you’re selling, the limit order will only be executed at the limit price or higher.
How a Limit Order Works?
A Limit Order only goes into effect and can be filled once the market price hits the limit price you've set.
For example, let’s say Bitcoin is currently trading at $10,000, and you want to buy it, but only if it drops to $9,500 or less (your limit price). You place a Limit Order at that price. If the market price drops to $9,500 or below, your order is triggered and can be executed at $9,500 or lower.
Benefits and Risks of Limit Orders
Like any trading strategy, Limit Orders have their benefits and risks.
Benefits
- Control: Limit Orders allow you to specify the price at which you're willing to buy or sell.
- No surprise prices: You won't pay more or receive less than your limit price.
- Potential for better prices: If the market moves in your favor, you could get a better price than with a market order.
Risks
- Missed opportunity: If the market price doesn't reach your limit price, your order will not be executed, potentially missing a trading opportunity.
- Partial fills: Depending on the liquidity of the cryptocurrency, you may not be able to buy or sell the entire order at the limit price.