Note: Use a limit order to guarantee a price. A limit order allows precise order entry. A limit order is appropriate if getting a specific price is more important than getting filled.
A limit order is an order to buy (or sell) at a specified price or better. A buy limit order (a limit order to buy) can only be executed at the specified limit price or lower. Conversely, a sell limit order (a limit order to sell) will be executed at the specified limit price or higher. Unlike a market order where the trader can simply press "buy" and let the market "choose" the price, a trader must specify a desired price when using a limit order. While a limit orders prevents negative slippage, it does not guarantee a fill. A limit order will only be filled if price reaches the specified limit price, and a trading opportunity could be missed if price moves away from the limit price before it can be filled. Note: the market can move to the limit price and the order still may not get filled if there are not enough buyers or sellers (depending on the trade direction) at that particular price level.
Limit orders allow traders to enter and exit trades with precision; however, they must be entered correctly to ensure that they accomplish the goal of improving price - that is, to get a specified price, or better, on a trade execution. It is important to be on the correct side of market: when entering a buy limit order, the trader must specify a price that is at or below the current bid; for a sell limit order, the specified price must be at or above the current market ask. The price ladder in Figure 2 demonstrates this concept.
Figure 2 - Enter a limit order to buy at or below the current bid; enter a limit order to sell at or above the current ask price. Image created with TradeStation.
Traders use limit orders to improve price and to take advantage of pullbacks in price. Figure 3 shows a five-minute chart of the e-mini S&P 500 futures contract, with a limit order waiting to be filled if the price drops back down to $1421.00. An OSO order (discussed in the Conditional Orders section of this tutorial) is attached that will automatically send profit target and stop-loss orders if the limit order to buy is filled (the profit target and stop-loss orders appear on the price chart as gray horizontal lines; the price level for the limit order to buy is blue).
|Figure 3 - This five-minute chart of the e-mini S&P 500 futures contract shows a limit order waiting to be filled if price drops back down to $1421.00. Image created with TradeStation.|
To illustrate how important it is to place the order on the correct side of the market, imagine placing a limit order to buy above the current market price. Using the example in Figure XX (where Alcoa is trading at $8.78), the trader enters a limit order to buy at $8.92 (above the current price). This order will be filled immediately (the market does not care if you don't know how to use a limit order) and the trader may consequently be in a losing position (since the current price is below the trade entry). A limit order is always used to get a certain price or better, and must be placed on the correct side of the market.
|Limit Order to Buy = at or below the market|
Limit Order to Sell = at or above the market
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