What are Limit Orders in Cryptocurrency?

Table of Contents

• What are limit orders?
• How do Limit orders work;
• When to use Limit orders
• Advantages of Limit orders
• Disadvantages of Limit orders
• FAQs
  
  

Like in the traditional stock market exchanges, there are different ways to place buy and sell orders in cryptocurrency trading. In a market as volatile as cryptocurrency trading, where prices fluctuate wildly in seconds, extra knowledge about the variety of trade types and orders might be essential for success. This will help you take advantage of the volatile market and make informed decisions during trading.  

There are four main order types for spot trades: limit, market, stop, and instant. In this article, we will explore the concept of limit orders, a popular order type in both traditional and cryptocurrency markets. Limit orders allow traders to purchase or sell a cryptocurrency at a specified price or better.

Limit orders in cryptocurrency trading function similarly to those in traditional markets but are executed on cryptocurrency exchanges.

What are limit orders? When do we use them? What are the pros and cons? This guide will help you understand how to purchase cryptocurrencies using limit orders during cryptocurrency trading.

What are Limit Orders?

Limit orders are fundamental tools in cryptocurrency trading. They allow traders to set specific price levels at which they want to buy or sell digital assets. A limit order is an instruction placed by a trader on a cryptocurrency exchange platform to buy or sell a certain amount of cryptocurrency at a specified price.

Unlike market orders, which involve trading at the current market price, limit orders will execute only when the market price reaches the specified price.

There are two types of limit orders:

The Buy Limit Order is where you set a limit order below the price that the asset is currently trading at, which will be triggered only if the price reaches that level. Traders use buy limit orders to purchase the crypto asset lower than the current market price.

The Sell Limit Order is used when traders typically want to sell the crypto asset higher than its current price. To use a sell limit order, you set a limit order above the price that the asset is currently trading at, which will be triggered only if the price reaches that level.

For example, if Bitcoin is currently trading at $20,000 and you want to sell 1 Bitcoin at $25,000, you can set a sell limit order at $25,000 for 1 BTC, which will only be triggered once the price reaches that level. If you buy one Bitcoin for $20,000 and it’s currently selling at $21,000, you can place a buy limit order, which will be triggered once the price drops.

The plus side of limit orders is that they allow buyers or sellers to trade at their preferred price and take advantage of the market’s constantly fluctuating prices without constantly scanning the market. The downside is that these orders are not guaranteed to be executed. If the cryptocurrency does reach the price specified in the limit order, it may never go through.

How do limit orders work?

• When a trader places a limit order on a cryptocurrency exchange platform, it gets added to the exchange’s order book.
  
• Buy limit orders are added as bids, while sell limit orders are added as asks.
  
• The order remains on the order book until the market price reaches the specified limit price or the trader cancels the order.
  
• Once the market price reaches the specified limit price, the exchange matches the limit order with a corresponding market order and executes the trade.
  
• Traders may use buy limit orders to accumulate cryptocurrency at lower prices during market dips or corrections and use sell limit orders to take profits at predetermined price levels, allowing traders to lock in gains when the market reaches the specified targets.
  

When to use limit orders

1. When time isn’t a concern, and you want to wait for a better price, if the situation is such that you don’t need to trade immediately, a limit order can help you capitalise on more favourable entry or exit points.
   
2. If you don’t want to monitor the market, a limit order can remove the emotional stress of market-watching from trading. If you’re worried about buying or selling a digital asset at the wrong time, you can set your limit order and go about your day without worrying (too much) about perfectly timing the market.
   
3. When you want some control over price, a limit order ensures you don’t buy above or sell below your specified price. If you believe a cryptocurrency to be temporarily overvalued or undervalued, a limit order allows you to set a target entry or exit point to take advantage of potential price movements.
   
4. Prices jump rapidly in volatile markets. Limit orders can help protect you and ensure a favourable price.
   
   

Advantages of Limit Orders

1. You don’t need to constantly monitor the market or stay glued to your screen 24/7. Once you set a limit order, it will automatically execute if or when the market reaches your specified price. With limit orders, you can assess the market situation on your own time and set limit orders that will fulfil buying and selling activities without your active participation.
   
2. One of the primary advantages of limit orders is that they give a trader more control over the execution price. Limit orders allow you to specify the maximum price you’re willing to pay for a buy order and the minimum price you’re willing to accept for a sell order. This protects you from getting unexpected “bad prices” if the market moves too quickly.
   
3. Limit orders help reduce the risk of slippage, which occurs when the execution price differs from the expected price. By specifying the price, traders minimise the risk of unexpected price changes during execution.
   
4. The cryptocurrency market is characterised by its volatility. Limit orders help protect you from sudden price swings. By setting one, you ensure your trades won’t be executed at unfavourable prices during volatile periods by ensuring you don’t buy higher or sell lower than your specified price.
   
5. Limit orders can be used to implement various trading strategies, like buying on dips or selling during rallies. By setting specific entry and exit points, you can capitalise on market movements.
   
   

Disadvantages and Potential Drawbacks of Limit Orders

1. One of the major drawbacks of limit orders is the risk of non-execution. Limit orders do not guarantee execution. If the market price does not reach the specified limit price, your order will remain unfilled. This can lead to missed opportunities, especially in fast-moving markets.
   
2. While you’re trying to aim for a better price with a limit order, there’s a possibility of missing out on favourable gains. If the market continues to trend upward after you set a buy limit order, you might miss out on potential profit while waiting for your order to fill at a lower price.
   
3. In highly dynamic markets, prices can become outdated quickly. You might need to constantly monitor and adjust your limit orders to ensure they remain relevant in the current market conditions.
   
4. In less liquid markets, large limit orders may only get partially filled, leaving a portion of the order unfilled or left to be executed at different prices. This means you may only execute a portion of your trade at your desired price, while the rest is left unfulfilled or executed later at less favourable prices.
   
5. The effective use of limit orders goes hand in hand with an understanding of market dynamics, technical analysis, and the ability to predict price movements and take risks. This may create a barrier to use, especially with less experienced traders.
   

To Recap

In summary, limit orders are a powerful tool in cryptocurrency trading. They offer traders a means of gaining control over their buy and sell prices in a volatile market. They offer advantages like automation, reliability, and convenience.

By setting your desired price point, you can protect yourself from market volatility and ensure you’re getting favourable prices.

Limit orders are easy to set up and configure, and understanding how they work and considering market dynamics can help traders make informed decisions in the cryptocurrency market.

FAQs

Q: What's a limit order in cryptocurrency trading?

A: It's when you tell the trading platform to buy or sell a digital coin at a certain price or better. You set the rules, so you only make a trade if it hits your target price.

Q: How does it work?

A: You pick a price you're happy with. If the market hits that price, the order goes through automatically. If not, it waits until it matches your terms, or you cancel it.

Q: Why should I use limit orders?

A: They let you control your buying or selling price, shield you from sudden price swings, and can even automate your trades based on your conditions. Plus, they keep you from making snap decisions based on emotions.

Q: What's the difference between buying and selling limit orders?

A: When you set a buying limit, it's below the current price. For selling, it's above. This way, you're clear about the price you're aiming for.

Q: What are the risks of using limit orders?

A: Sometimes, your order might not get filled if the market doesn't reach your price. Also, if the market changes fast, you might not get your desired price, which could mean missing out on opportunities or facing losses.

Q: Can I use limit orders with other strategies?

A: Yes! Combine them with stop-loss or take-profit orders to create more advanced plans. It helps you manage risks and make the most out of your trades.

Q: How do I place a limit order?

A: You pick the trading pair, choose how much of the cryptocurrency you want to trade and set your price. Once you hit submit, your order is on the platform until it's filled or you decide to cancel it.

Disclaimer: This article was written to provide guidance and understanding. It is not an exhaustive article and should not be taken as financial advice. Obiex will not be held liable for your investment decisions.