Trading Terminology: Limit Order

limit order definition

One of the most common questions we get is, “what kind of order should I use to buy and sell stocks?” There are a few different types of orders you can use to buy and sell shares of stock with.  A limit order is a type of order that allows you to buy a specific number of shares at a specified price. It is the best order to use to enter and exit your positions. Here a few reasons why you should be using a limit order every time you trade.

No Slippage

Slippage is annoying way to get a bad entry price. If you use a market order to enter your positions, you will often get filled at a price much higher then you intended. Market orders are orders that will execute any amount of shares at whatever the price the stock is trading at. To get the shares you want at a specific price, you use a limit order. It is especially important to use limit orders with less liquid stocks, because they will have bigger spreads. If you market order with such big spreads you may get fills .25-.75 from your intended buy price.

Add Liquidity to Save on Commissions

Limit orders allow you to add liquidity, and get rebates from exchanges. They are small rebates, but it is better than nothing. Adding liquidity is putting your order on the bid if you’re looking to buy shares, and on the ask if you’re looking to short/sell shares. You’re waiting for the market makers to fill your order instead of you hitting the ask or bid. The downside to this is that you have to wait for your order to get filled, and sometimes you will get no fill at all and miss your entry/exit.

Great For Exiting Positions

A lot of stocks will be fast moving and have spreads. For these reasons, it is useful to plan your exits and put your limit orders in advance. Fast moving stocks will often spike up or down to a level then quickly retrace, making it hard to fill by hand sometimes. There is an art to placing your orders in the right spots to ensure they get filled. It’s a good idea to plan your exits near half and whole numbers, and place your exits accordingly. It’s not essential to always pre-plan your exits with limits. If you’re quick and able to react fast enough. It all depends on what makes you comfortable as a trader.

If you want some direct feedback on where you are as a trader and your trading goals, you should take our free trader assessment for advice on how to take your trading to the level. We will also direct you to our free webinar “How to make $200 a Day Trading” to give you even more free insight on how to achieve consistency in trading.



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