What Is a Limit Order?

What Is a Limit Order?

What Is a Limit Order?
When trying to learn how to use a cryptocurrency exchange effectively, many users are unclear on what limit orders are and how they function. While the terminology can sometimes be daunting, the limit order is a very simple concept at its core.

Limit orders are used to purchase or sell assets at a pre-determined price target or better. Because limit orders only trigger when a specific price is met, there is no guarantee that the order will be executed if the price is not met before the order is cancelled.

What is a buy limit order?
First, let us take a look at a buy limit order: Let’s say that John is holding USD, but he would like to purchase 1 BTC. Let’s assume that the current price of BTC is $10,000. John wants to exchange some of his USD for 1 BTC, but he believes he can get a better deal in the future. He then goes to a cryptocurrency exchange that supports the limit order functionality and places a buy limit order for 1 BTC at $9,500, because he thinks it is a good entry point.

When and if the price of BTC on the exchange drops to the specified level, his buy limit order will execute automatically and he will purchase 1 BTC for $9,500. He could even pay less than $9,500 for each BTC he receives this way, depending on how fast his order executes, but he would in no circumstance pay more for each BTC than the $9,500 limit.

In some cases, you might experience a “partial execution” of the order. If the price is met, but the quantity offered at that price does not completely fill the order, it executes only a portion of it. This happens when the spread between the buy and sell orders is wide and/or when the liquidity of a token or coin on an exchange is not high enough.

What is a sell limit order?
Sell limit orders work the same way, but in the other direction – John holds 1 BTC intending to sell it for profit, but he thinks he can get a better deal than $10,000 for his Bitcoin. John then sets a sell limit order for 1 BTC at $11,000, a price he is happy selling at.

When the price of BTC on the exchange rises to the $11,000 limit, his sell order will execute automatically. John will receive $11,000 or more for 1 BTC depending on how fast the order executes, but he cannot receive less.

Please note that limit orders are not guaranteed to execute, as technical difficulties on the exchange, for example, could cause the limit order not to go through, but there can also be other issues.

Let’s say that John placed a sell limit order for $11,000 on the exchange, and the price only rose to the $11,000 limit for an extremely short period of time before dropping below the limit. It is possible that other orders at $11,000 other than John’s will execute first, and John’s sell limit order will not have the opportunity to execute in full even though the price hit his desired sell target.