A limit order is used to specify the exact price at which a trader is willing to buy or sell an asset. Limit orders enjoy reduced “market maker” trading fees, as they provide liquidity to the order book – meaning they contribute to the number of resting orders that are present in the order book on an exchange.
For buy limit orders, the order is executed and filled only at the limit price indicated or a lower one. This allows traders to better control the prices at which they buy or sell inventory.
For example, if a trader wishes to buy BTSE Tokens and sets a buy limit order of $5.50 or lower, the order will only be filled and executed if the token’s market price goes to $5.50 or lower. If a trader wishes to sell some other token and sets a sell limit order of $23.40, the order will only be filled if the price hits $23.40 or higher.
Until the price is hit in either scenario, the open limit order sits on the order book without being executed or filled.
When should you use a limit order?
A trader should use a buy limit order when they want to guarantee the order only gets filled when it hits that specified price or better, and does not mind waiting until it does.
In this way, a limit order gives the trader control over the execution price of a crypto asset or security. It can be especially useful for periods of heightened market volatility, during which the trader may want to specify exactly at which price they wish for the order to be filled. Also, using a market order during such periods may create a poor fill if a cryptocurrency is rising or falling very rapidly.
A limit order is also preferable if a trader wishes to plan their entry or exit ahead of time instead of actively watching the market. They may also have a specific price in mind at which to buy or sell that crypto.
What are the advantages and disadvantages?
In contrast to market orders, limit orders guarantee the order price but not the filling of the order. The advantage, therefore, is that a limit order can allow a trader’s order to be filled at a preferred price, either at the ask or at the bid for example, depending on the trade.
If the market does not reach that price, the limit order will not be filled. The disadvantage is that the trader has to wait until the market price hits the specified price in order to be filled, which may take hours, days, or weeks, depending on how the market is moving.
Traders using limit orders also enjoy reduced fees in maker-taker fee schedules and pay market maker rates, since limit orders provide liquidity to the order book. Market orders, on the other hand, take liquidity from the order book and pay taker fees.
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Note: BTSE Blog contents are intended solely to provide varying insights and perspectives. Unless otherwise noted, they do not represent the views of BTSE and should in no way be treated as investment advice. Markets are volatile, and trading brings rewards and risks. Trade with caution.
