A limit order gives you control over the price you pay when buying stocks or the price you receive when selling. Unlike market orders that execute immediately at any price, limit orders only fill at your specified price or better. Here is everything you need to know about using them.
What is a Limit Order?
A limit order is an instruction to buy or sell a stock only at a specific price or better. When you set a limit order, you are telling your broker the maximum price you will pay (for buys) or the minimum price you will accept (for sells).
Think of it like making an offer: You tell a seller "I will buy this for $50, but not a penny more." If they agree to your price, the deal happens. If they want more, you walk away.
How Limit Orders Work
Buy Limit Orders
A buy limit order sets the maximum price you are willing to pay. Your order will only execute if the stock price drops to your limit price or lower.
Buy Limit Example
Tesla (TSLA) is trading at $250. You think it is overpriced but would buy at $240.
- You place a buy limit order at $240
- If TSLA drops to $240 or below, your order fills
- If TSLA stays above $240, your order does not execute
- You might get filled at $239.50 (better than your limit)
Sell Limit Orders
A sell limit order sets the minimum price you will accept. Your order will only execute if the stock price rises to your limit price or higher.
Sell Limit Example
You own shares of Netflix (NFLX) bought at $400. You want to take profit at $450.
- You place a sell limit order at $450
- If NFLX rises to $450 or above, your order fills
- If NFLX stays below $450, nothing happens
- You might get filled at $450.25 (better than your limit)
Advantages of Limit Orders
1. Price Control
You decide exactly what price you are willing to trade at. No surprises, no slippage beyond your limit. This is especially valuable in volatile markets.
2. Better Fills on Patient Trades
If you are not in a rush, limit orders often get you better prices. Stocks fluctuate throughout the day, and a well-placed limit can capture favorable moves.
3. Works While You Are Away
Set a limit order and walk away. Your broker watches the market for you and executes when your price is hit. No need to stare at screens all day.
4. Protection from Bad Fills
In fast-moving or illiquid markets, limit orders protect you from getting terrible prices. Your order simply will not fill if the price is not right.
5. Discipline
Limit orders force you to decide your price in advance. This prevents emotional decisions and helps you stick to your trading plan.
Disadvantages of Limit Orders
1. No Guarantee of Execution
If the stock never reaches your limit price, your order never fills. You might miss out on a trade entirely.
2. Partial Fills
Sometimes only part of your order gets filled if there is not enough volume at your price. You might want 1,000 shares but only get 500.
3. Opportunity Cost
While waiting for your limit price, the stock might move away from you. Being too greedy with limits can mean missing good trades.
Missed Opportunity Example
A stock is at $100. You set a buy limit at $98. The stock dips to $98.50 then rallies to $120. Your limit never filled, and you missed a 20% gain because you wanted an extra $1.50 off.
When to Use Limit Orders
- You have a specific target price: Know exactly what you want to pay or receive
- Trading less liquid stocks: Protect yourself from wide spreads
- Not in a rush: You can wait for the market to come to your price
- Volatile markets: Avoid getting filled at extreme prices
- Setting profit targets: Automatically sell when your goal is reached
- Buying pullbacks: Set orders below current price to catch dips
When Market Orders Are Better
- You need to exit immediately: Stop losses or urgent exits
- Highly liquid stocks: Tight spreads make limits less necessary
- Speed matters more than price: Breaking news situations
- Small positions: The price difference is negligible
Limit Order Duration Options
When placing a limit order, you also choose how long it stays active:
- Day order: Expires at market close if not filled
- Good til canceled (GTC): Stays active until filled or you cancel it
- Immediate or cancel (IOC): Fill immediately or cancel
- Fill or kill (FOK): Fill the entire order immediately or cancel everything
Tips for Using Limit Orders Effectively
- Be realistic: Setting limits too far from current price means they rarely fill
- Check the spread: Place your limit within or near the bid-ask spread
- Use technical levels: Set limits at support and resistance levels
- Monitor your orders: Review open limits and adjust as conditions change
- Do not chase: If a stock runs away from your limit, do not raise it impulsively
- Consider volume: More volume means better chance of getting filled
Limit Orders and Support/Resistance
Smart traders use technical analysis to set their limit prices. Key levels include:
- Support levels: Set buy limits just above support where buyers step in
- Resistance levels: Set sell limits just below resistance where selling typically starts
- Moving averages: Price often bounces off the 50-day or 200-day moving average
- Round numbers: Stocks often find support or resistance at $50, $100, etc.
Track Every Order You Place
Pro Trader Dashboard shows you all your orders, fills, and performance. See which limit orders get the best results.
Summary
Limit orders give you control over price at the cost of guaranteed execution. They are essential tools for disciplined trading, especially in volatile or illiquid markets. Use them to set entry points, profit targets, and protect yourself from bad fills.
To complete your understanding of order types, learn about market orders for immediate execution, or read about stop loss orders for protecting your trades.