1. Introduction To Order Types: Introduction
  2. Introduction To Order Types: Long And Short Trades
  3. Introduction To Order Types: Market Orders
  4. Introduction To Order Types: Limit Orders
  5. Introduction To Order Types: Stop Orders
  6. Introduction To Order Types: Conditional Orders
  7. Introduction To Order Types: Duration
  8. Introduction to Order Types: Conclusion

Use a limit order to guarantee a price. A limit order allows precise order entry, and is appropriate if getting a specific price is more important than getting filled.

limit order is an order to buy or sell at a specified price or better. A buy limit order (a limit order to buy) is executed at the specified limit price or lower (i.e., better). Conversely, a sell limit order (a limit order to sell) is executed at the specified limit price or higher (again, better). Unlike a market order, where you simply press "buy" and let the market choose the price, you have to specify a price when using a limit order.

While a limit order prevents negative slippage, it doesn’t guarantee a fill – it will only be filled if price reaches the specified limit price. You could miss a trading opportunity if price moves away from the limit price before your order can be filled – 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. (For more, see Why is the Execution of a Limit Order Not Guaranteed?)

Limit orders let you enter and exit trades with precision; however, you have to enter them correctly to ensure they accomplish the goal of improving price – that is, to get a specified price or better. It’s important to be on the right side of market, otherwise you’ll get filled at the market price. When placing a buy limit order, specify a price that’s at or below the current bid; for a sell limit order, specify a price that’s at or above the current ask. 

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. The following chart shows a limit order waiting to be filled if price drops back down to $1421.00. An OSO order (discussed in the Conditional Orders section of this tutorial) is attached that automatically sends 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.

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

Introduction To Order Types: Stop Orders
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